Published On:Sunday, 25 December 2011
Posted by Muhammad Atif Saeed
Basic Accounting Concepts/Principles
Accounting measurement concepts and principles are practices which accounting follows. These inform the specific rules that govern how accountants measure, process and report financial information.
· The Entity Concept
o The Entity concept defines the entity for which accounting data are collected. An accounting entity is an organisation, or section of an organisation, that stands apart from other organisations and individuals as a separate economic unit.
o Example: In a Business, the owner(s) would account for the organisation as a separate entity to their personal belongings.
· The Accounting Period Concept
o The accounting period concept defines the unit of time for which accounting data are collected. Accountants estimate profitability in the short segments of time that are called Accounting Periods.
· The Cost Principle
o The Cost principle states that accounting measures are based upon transaction costs. Goods and services acquired from suppliers are recorded at their actual purchase cost (Historical Cost accounting). A good that is purchased, is recorded at the Price Purchased and not the value of the good (that may have been able to be purchased cheaper elsewhere).
· The Matching Principle
o The matching principle relates a business’s inputs and outputs of goods and services to one another. The costs of inputs used up to produce outputs, are treated as expenses and subtracted from proceeds resulting from the sales of those outputs (Revenue). The result is a Profit or Loss.
· The Profit Recognition Principle
o Income for an accounting period is the increase in equity in that accounting period. Revenue is income that arises in the course of ordinary activities. The way in which the profit/loss is recognised refers to the profit recognition principle in accounting. This could be recognised when cash is paid (Cash-basis accounting) or when sales orders/purchases of inputs are first made, by estimating the eventual income (Accrual basis of Accounting).
· The Conservatism (Prudence) Principle
o The conservatism principle in accounting refers to the manner in which profits and losses are recognised. Managers may try to present a biased view of the business, and in doing so may mislead public reporting higher asset values and higher profits. (Through capitalising a cost that should be expensed).
· The Going-Concern Principle
o Under the Going Concern Principle, accountants assume that the business as a whole will continue operating for the foreseeable future. Once the business goes through cessation, it sells its assets, converting them to cash (liquidation). This cash is then used to repay liabilities.
