Accounting Concept Flashcards
What is the Business Entity Concept?
This concept treats the business and its owner as two separate entities, ensuring clarity in financial records and preventing mixing of personal and business expenses.
An example includes treating an owner’s investment as capital and withdrawals as drawings.
What is the significance of the Money Measurement Concept?
It provides a common measurement unit (money) for accounting and helps maintain objectivity and uniformity.
Goodwill or employee satisfaction is not recorded as they cannot be measured in monetary terms.
What does the Going Concern Concept assume?
It assumes that the business will continue to operate for the foreseeable future, affecting how assets are valued and reported.
For example, a machine is depreciated over time instead of being expensed fully at purchase.
What is the Cost Concept (Historical Cost)?
Assets are recorded at their original cost, not at current market value, ensuring reliable data and avoiding manipulation.
Land purchased at Rs. 20,00,000 is recorded at that price, regardless of market fluctuations.
What is the Dual Aspect Concept?
Every transaction affects two accounts: one debit and one credit, forming the base of double-entry accounting.
For example, borrowing Rs. 2,00,000 increases cash (debit) and bank loan (credit).
What is the Accounting Period Concept?
The life of the business is divided into specific time periods to prepare financial statements, typically annually.
Only transactions within a defined period, such as 1st April 2024 to 31st March 2025, are recorded.
What does the Matching Concept require?
Expenses must be recorded in the same accounting period as the revenues they helped to earn, ensuring accurate net profit calculation.
For example, commission paid in April for a sale in March should be recorded in March.
What is the Realisation Concept (Revenue Recognition)?
Revenue is recognized when it is earned, not when cash is received, ensuring correct timing of income.
Goods sold on credit in March are recorded in March, regardless of payment timing.
What does the Accrual Concept state?
Revenues and expenses are recognized when earned or incurred, not when money is received or paid, presenting a true financial position.
Rent due for March but paid in April is recorded as an expense for March.
What is the Conservatism Concept (Prudence)?
Accountants should anticipate all losses but not record gains until realized, preventing overstatement of income or assets.
A potential bad debt is recorded, but asset value increases are not until the asset is sold.
What is accounting concept
