Describe any two accounting concepts which guide the accountant at the recording stage.

Accounting concepts are broad working rules adopted by the accounting profession as guides for recording and reporting the affairs and activities of a business. For convenience, these concepts are classified into two groups:

(i) Concepts to be observed at the recording stage

(1) Business Entity Concept: This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate. For example, when the owner invests money in the business, it is recorded as liability of the business to the owner.

(2) Money Measurement Concept : All business transactions must be in terms of money that is in the currency of a country. In our country such transactions are in terms of rupees. Thus, as per the money measurement concept, transactions which can be expressed in terms of money are recorded in the books of accounts.

(3) Objective Evidence Concept: The term objectivity refers to being free from bias or free from subjectivity. Accounting measurements are to be unbiased and verifiable independently. For this purpose, all accounting transactions should be evidenced and supported by documents such as bills, invoices, receipts, cash memos, etc.

(4) Historical Record Concept: After identifying the transactions and measuring them in terms of money we record them in the books of account. According to the historical record concept, we record only those transactions which have actually taken place and not those which my take place (future transactions). It is because accounting record presupposes that the transactions are to be identified and objectively evidenced.

(5) Cost Concept: Business activity, in essence, is an exchange of money. The price paid (or agreed to be paid in case of a credit transaction) at the time of purchase is called cost. According to the cost concept, all assets are recorded in books at their original purchase price. This cost also forms an appropriate basis for all subsequent accounting for the assets.

(6) Dual Aspect Concept: Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts. This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. Therefore, the transaction should be recorded at two places. It means, both the aspects of the transaction must be recorded in the books of accounts

(ii) Concepts to be observed at the reporting stage i.e. at the time of preparing the final accounts

These concepts are concerned with the preparation of final accounts and their reporting to the interested parties. Let us now discuss them one by one.

1. The Going Concern Concept: Normally, the business is started with the intention of continuing it indefinitely or at least for the foreseeable future. The investors lend money and the creditors supply goods and services with the expectation that the enterprise would continue for long. Unless there is strong evidence to the contrary, the enterprise is normally viewed as a going (continuing) concern. Hence, financial statements are prepared on going concern basis and not on liquidation (closure) basis.

2. The Accounting Period Concept: You know the going concern concept assumes that the business will continue for a long period, almost indefinitely, but the businessmen cannot postpone the preparation of financial statements indefinitely. Therefore, he prepares them periodically. This will also enable other interested parties such as owners, investors, creditors, tax-authorities to make periodic assessment of its performance. So, the life’s of the business enterprise is divided into what are called ‘accounting periods’. The profit or loss and the financial position at the end of each such accounting period is regularly assessed.

3. The Matching Concept: This is also called ‘Matching of Costs against Revenues Concept’. To work out profit or loss of an accounting year, it is necessary to bring together all revenues and costs pertaining to that accounting year. In other words, expenses incurred in an accounting year should be matched with the revenues earned during that year.

4. The Conservatism Concept: This is also known as prudence concept. This concept tries to ensure that all uncertainties and risks inherent in business are adequately provided for. Accountants generally prefer understatement of assets or revenues, and overstatement of liabilities or costs.

5. The Consistency Concept: The principle of consistency means ‘conformity from period to period with unchanging policies and procedures’. It means that accounting method adopted should not be changed from year to year. For example, the principle of valuing closing stock ‘at cost price or market price whichever is lower’ should be followed year after year.

6. The Full Disclosure Concepts: You know the financial statements are the basic means of communication of financial information to all interested parties. These statements are the only source for assessing the performance of the enterprise for investors, lenders, suppliers, therefore, financial statements and their accompanying foot-notes should completely disclose all relevant information of material nature which relate to the profit and loss and the financial position of the business.

7. The Materiality Concept: This concept is closely related to the full disclosures concept. Full disclosures do not mean that everything should be disclosed. It only means that all relevant and material information must be disclosed. Materiality primarily relates to the relevance and reliability of information. An item is considered material if there is a reasonable expectation that the knowledge of it would influence the decision of the users of the financial statements.

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