Accounting operates on certain fundamental concepts and assumptions known as accounting principles. These principles provide the conceptual foundation for recording, measuring, and reporting financial information. They ensure consistency, reliability, and comparability. These concepts define the basic assumptions on which the entire accounting system is built:
ü Business Entity Concept
The business is treated as a separate and independent entity, distinct from its owner, and only business-related financial transactions are recorded in the books of accounts.
ü Money Measurement Concept
Only those transactions that can be expressed and measured in monetary terms are recorded in accounting, while non-monetary events are excluded.
ü Going Concern Concept
The business is assumed to continue its operations for the foreseeable future, and it is not intended to be liquidated or closed in the near term.
ü Accrual Concept
Revenues and expenses are recorded in the period in which they are earned or incurred, regardless of when the actual cash is received or paid.
ü Cost Concept
Assets are recorded at their original purchase cost, including incidental expenses, and not at their current market value.
ü Matching Concept
Expenses are matched with the related revenues of the same accounting period to determine the correct profit or loss.
ü Dual Aspect Concept
Every business transaction has two equal and opposite aspects, and both must be recorded to maintain accounting balance, forming the foundation of the double-entry system.