10 Major Types of Accounting Concepts | Accounting Principles
The following points highlight the ten major types of accounting concepts. The ten concepts are: 1. Business Entity Concept 2. Going Concern Concept 3. Money Measurement Concept (Monetary Expression) 4. Cost Concept 5. Accounting Period Concept 6. Dual Aspect Concept 7. Matching Concept 8. Realisation Concept 9. Balance Sheet Equation Concept 10. Verifiable and Objective Evidence Concept.
Accounting Concept Type # 1. Business Entity Concept:
Under this concept, it is assumed that the business unit is distinct and completely separate from its owners (including employees, officers, creditors and others who are associated with it).
For accounting purposes, the business enterprise exists in its own right.
As a result, transactions should be recorded in the books of accounts with such persons and individuals together with the owners. It becomes necessary that accounting records of the business must be maintained in a manner which is free from any bias to any particular section of people related to it.
As such, accounts are maintained for business entity as distinguished from all categories of persons related to it. For recording transactions the pertinent question which arises is: How far such transactions affect the business itself, and not: How do they affect the people associated with it.
When the owner introduces cash to the business as capital, it simply means an inflow of cash to the business which is recorded in business books. But actually, to an owner, it is a shift from the personal cash to the business cash.
However, some practical difficulties may arise by defining a business entity for which accounts are kept, specially in case of sole proprietorship and partnership business, and that of the people who own it. That is, a sole trader is personally liable for his business debts and may be required to use non-business (Personal) assets in order to pay-off the business debts. On the contrary, business assets of the Sole-Proprietor may be utilised for paying-off the personal obligation of the Proprietor, i.e., in the eye of law, business and non-business (Personal) assets and liabilities are treated alike in the case of a Sole-Proprietor.
Same principle is, however, applicable in case of a partnership firm, i.e., after paying- off the business liabilities, if any surplus remains, the same can also be used in order to pay-off the personal obligation of the partners. In case of a company, however, the entity of the business is legally separated from that of the owners. The application of the concept becomes relatively easier in this case.
Practical difficulties arise by identifying business affairs of a group of companies under common management. Thus, if eight companies, under the same management, utilise common services like accommodation, office and administration service etc., the problem of allocation of such common services among all the eight companies would not be an easy task. Besides, at its initial stage, accounting had the basic stewardship function.
Consequently, the manager of the firm was supplied with the necessary funds by the owners and the lenders. It was the duty of the management to utilise such funds properly and the reports of the financial accounting were designed to project how best the management discharged this stewardship function. The origin of this concept can be traced from this stewardship function.
Thus, accounting to this concept, suggested that the affairs of the business must not be mixed up with the private affairs of owners or other persons associated with it. As such, this concept helps to give a true picture of the financial conditions of a business enterprise.
Accounting Concept Type # 2. Going Concern Concept:
This concept assumes that the business entity has a continuity of life or the future of a business enterprise is to be prolonged or extended indefinitely, i.e., continuance of the activity and not dissolution/liquidation is the normal business process. In other words, a business is viewed as a mechanism for continuous additions of value to the resources or utility used by such unit. The success or failure of the business is measured by the difference between the value of its output (sale/or services) and the cost of such output.
It has been stated above that the business entity has a continuity of life. Since there is some degree of continuity of every entity and no one can accurately predict the future of an entity due to the possibility of cessation of its life, it is more convenient to treat the same as a going concern. But this does not mean that the business entity has a perpetual life.
This concept recognises the value of the assets and liabilities of the business enterprises on the basis of their productivity and not on the basis of their current realisable value on the assumption that they are to be disposed of. Since they are held in a ‘going concern’ for earning revenue and not for resale, there is no such utility to show the expected realisable values in the Balance Sheet. Besides, under this concept, prepaid expenses are recognised as assets since the benefits will be utilised in future when the business entity will continue. Going Concern Concept helps other business undertakings to make contracts with specific business units for business dealings in future. It also stresses more emphasis on the earning capacity in judging the overall performance of the business.
Accounting Concept Type # 3. Money Measurement Concept (Monetary Expression):
In accounting, all transactions are expressed and interpreted in terms of money. The benefit of this expression is that it provides a common denominator or unit of measurement by means of which heterogeneous facts about a business can be expressed in terms of quantities which can either be added or subtracted. Since different transactions occur they are recorded and interpreted in various accounts in monetary terms. So, accounting helps to express heterogeneous economic activities in terms of money.