Concept of Accounting
Before understanding the account, let’s look at the following diagram. We can draw a definition of accounting from the input, process and output concept as shown in the diagram below.
- Accounting is the process of identifying financial transaction, systematic and scientific record keeping, classifying summarizing and preparing the final statement in order to provide information to the stakeholders.
- Accounting is the language of business and mirror of the financial transaction.
- It is the art and science of the record keeping/bookkeeping the reporting.
- It is a combination of records, reports, ledger and financial documents which are related to legal transactions.
Those concepts which are accepted by the universal mass are called principles. The accounting concepts or bases which are accepted universally are known as accounting principles. There are 10 accounting principles. They are
- Money Measurement Concept
- Business Entity Concept
- Single Entry Concept
- Cost/Cash Basis Concept
- Accrual Basis Concept
- Double Entry Concept
- Going Concern Concept
- Matching Concept
- Historical Cost Concept
- Accounting Period Concept
1. Money Measurement Concept
Money measurement concept defines that only monetary transaction which can be expressed in monetary value are recorded in accounting. Non-monetary transactions are not recorded in the accounting process.
2. Business Entity Concept
In the accounting system, business and owner must be treated separately.
3. Single Entry Concept
If there are no debit and credit rules in accounting activities and only personal accounting including cash content of real account are recorded then this type of accounting approach is called the single entity concept. This concept is only used in the household sector but no used business and organizational sectors.
4. Cash Basis Concept
Accounting keeps a record only cash-based transactions of a given period of time. This concept excludes receivable and payable transaction. (If cash received – record it other side do not record).
5. Accrual Basis Concept
Accrual basis concept tells that record all the business transaction including cash, receivable, payable transactions. All the transactions which are happened on a given period of time should be included in the accounting.
6. Double Entry Concept
If each and every financial activities are recorded by using the rule of debit and credit then such modern, fundamental, systematic and scientific concept of accounting is called double entry system.
7. Going Concern Concept
While performing accounting activities it should be considered that organizations will run forever. This concept defines the rule of accounting preparation with the mindset that the organization never becomes terminate.
8. Matching Concept
There must be coordination between the income and expenses of the entity. Those expenses which are related to income generation activities within a given period of time should be recorded. (Concept of if you invest, you should get a return).
9. Historical Cost Concept
Historical cost concept defines that organizations record financial transaction considering the original price, not market price. The valuation of the fixed assets should be recorded in its original price, not in the current value price.
10. Accounting Period Concept
Every 12 months should be considered as an accounting period or fiscal year for the recordkeeping and reporting of financial transactions. Accounting period concept is also called periodicity concept.
These are the major principles of accounting followed all over the world while carrying out accounting activities. Accounting is one of the core activities of an organization today. All the profit and loss, income, gain and expenses of an organization is clearly reported by the accounting system. So, following the universally accepted principle is a must for preparing transparent and accurate financial statement.