Accounting concepts are universally accepted rules that works as basis for transactions recording and accounts preparations. The aim of concepts is to maintain good uniformity and consistency of accounting records worldwide. They include; Business entity concept Money measurement concept Going concern concept Accounting period concept Accounting cost concept Duality aspect concept Realization concept Accrual concept Matching concept Verifiability and objectivity of evidence concept Legal aspect conceptBusiness entity concept Takes the assumption that the business and business owner are two independent entities, thus separate transactions of each. Owner investment in the business is recorded as a liability. When the owner withdraws money from the business accounts for his personal expenses, then its termed as drawings. Business entity concept is important as it; It helps calculate profits of the business by taking into account the revenues and expenses of the business ignoring the owner’s personal expenses.
Restrains the accountants from recording private assets. Example; MR. Kamau withdraws ksh30,000 from the bank to pay for son’s school fees. The transaction will be treated as a drawing and not as a business expense.
Money measurement concept The concept dictates that the business transactions should be monetary value for them to be recorded in the books of accounts. Transactions that have monetary value are not captured while recording in the books of accounts. The monetary value should be expressed I terms of currency of the country e.g. Kenya shillings, us dollar, rupee etc. Example 1 ACRE of land as a business asset cannot be recorded in the books of accounts in terms of acres.
A monetary value should be attached to the land such as 1 million Kenya shillings for the recording in the accounts. Money measurement concept is important as it; Gives guidance on what is to be recorded and what is to be ignored Helps in uniform recording of transactions Simplifies the understanding of accounts as they are in monetary terms Facilitates comparison of different accounting periods Going concern concept States that every business has a continuity of life. It takes into account that the business won’t close down anytime soon, thus if cash is spent on an item then it won’t be proper to charge the amount from the revenues of that year, but only a part of value is shown as an expense and the remaining balance as an asset. Example.
A vehicle bought at kshs1.1million, being valued at kshs900,000 after a year. The 900,000shs will be recorded as an asset while 200,000shs will be recorded as an expense (depreciation). The importance of this concept; Preparation of financial accounts i.e. balance sheet.
Shows depreciation charged on assets. Assurance of returns on investments. Business gauged on ability to make more profits in future. Accounting period concept All transactions are recorded in accounts books assuming that profits made from the transactions will be calculated for a specific period (accounting period). The concept requires regular preparation of financial statements. Significance prediction of business future prospects.
Tax calculation Business performance analysis Facilitate distribution of business income. Accounting cost concept Also known as historical cost concept. States that all the assets are recorded in the books of accounts at their purchase price which is inclusive of acquisition, transport and installation costs and not the market price. Example Mr.
Kamau bought a machine worth 30,000shs from Nairobi. The transportation to the business premises cost him 4000.shs and machine installation cost of 2,000shs. The total amount to be recorded in accounts books is 36,000shs. Thus, according to this concept if an asset is acquired for free the no recording of transaction is made. The concept is important as: Acquisition cost is made and should be verified from supporting documents. Helps calculate value of fixed assets.
Dual aspect concept It’s the basic principle of accounting. Assumes every business transaction has a dual effect, thus it should be recorded in two different accounts. The following formula is used. Assets=liabilities + capital.
It states that at anytime of a business assets are always equal to liabilities plus capital. Example Mr. Kamau buys furniture worth 10,000 for the business in cash. Two accounts will be affected from the above transaction that is the furniture account and the cash account. In recording of transactions the furniture account will be debited with 10,000shs while the cash account will be credited with the same amount. The importance of the concept; Helps in errors detection Realization concept Takes into account that revenues should only be recorded in the books of accounts after their realization.
It helps in making accounting information more objective. Provides that transactions can only be recorded after goods have being delivered to the buyer. Example On 15/3/18 Mr. kamau business received an order worth 50,000shs from Hassan, the goods were delivered to Hassan on 20/6/18. From the realization concept the recording of transactions should be done on 20/6/18 when the order was delivered. Accrual concept Accrual means when it becomes due.
The concept implies that revenues are only recognized only become realized or when the expenses are due. Example. Electricity bills become due at the end of the month, that’s when the recording should be done. The concept is important in that; It helps to know actual revenues and expenses of the business Facilitates net profit calculation. Matching concept.
It states that the revenues and expenses incurred to earn revenues must belong to the same accounting period. Important in determination of profits or loss of a particular period. Verifiability and objectivity of evidence concept This concept states that are recorded business transaction should be backed by supportive. Example; cash purchase of item should be backed by cash receipt. Legal aspect concepts States that the recording of transactions should be guided by laid legal framework. And the accounting statements conform to legal requirements.
