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Concepts & principles

1. Business Separate Entity ConceptThe business entity concept states that you must separately record the transactions associated with a business from those of its owners or other businesses. Doing so requires the use of separate accounting records for the business that completely exclude the assets and liabilities of any other entity or owner. This concept is one of the basic accounting principles.Ex: - A business issues a $1,000 distribution to its sole shareholder. This is a reduction in equity in the records of the business, and $1,000 of taxable income to the shareholder.

2. Going Concern ConceptFinancial statements are prepared assuming that the company is a going concern which means that the company intends to continue its business and is able to do so. The status of going concern is important because if the company is a going concern it has to follow the generally accepted accounting standards. The auditors of the company determine whether the company is a going concern or not at the date of the financial statements.

Ex: - An oil and gas firm operating in Nigeria is stopped by a Nigerian court from carrying out operations in Nigeria. The firm is not a going concern in Nigeria, because it has to shut down.

3. Money Measurement ConceptThe money measurement concept states that a business should only record an accounting transaction if it can be expressed in terms of money. This means that the focus of accounting transactions is on quantitative information, rather than on qualitative information. Thus, a large number of items are never reflected in a company's accounting records, which means that they never appear in its financial statements.Examples of items that cannot be recorded as accounting transactions because they cannot be expressed in terms of money include: Employee skill level, Employee working conditions etc.

4. Periodicity Concept

This concept assumes that financial results (profit/loss) of a company is calculated at predefined accounting periods (annually, half-yearly, quarterly, and monthly) and not deferred until the termination of the business. And it states that every transaction should be assigned to its relevant accounting period. However this is governed by various accounting standards such as accruals prudence and realization concepts.

5. Accrual Concept

The accruals concept states that expenditure incurred in a particular accounting period accounted for in that period, irrespective of whether or not it has been involved or paid for. Similarly income that has been earned in that period should be accounted for that period irrespective of the date of the invoice or the receipt of money from the transaction.

6. Principle of Income RecognitionThe income recognition principle states that, under the accrual basis of accounting, you should only record income when an entity has substantially completed a revenue generation process; thus, you record revenue when it has been earned. For example, a snow plowing service completes the plowing of a company's parking lot for its standard fee of $100. It can recognize the income immediately upon completion of the plowing, even if it does not expect payment from the customer for several weeks.

7. Principle of ExpenseThe principle of expense simply lets the expenses follow the revenues. Revenue recognition and expense recognition work together to provide the actionable events of a given accounting period. When expenses make their contribution to revenues is the point when expense recognition takes place, regardless of when the expense is paid. This is also known as the matching principle which shows that efforts are equal to results.

8. Principle of matching cost and revenue

A fundamental concept of accrual basis accounting that offsets revenue against expenses on the basis of their cause-and-effect relationship. The principle states that, in measuring net income for an accounting period, the costs incurred in that period should be matched against the revenue generated in the same period.

For example, wages and materials bought to construct a rental property are depreciated over the period the building generates income, not during the construction period.

9. Principle of Historical costAn accounting method in which assets are listed on a balance sheet with the value at which they were purchased, rather than the current market value. The historical cost principle is used to reflect the amount of capital expended to acquire an asset, and is useful for matching against changes in profits or expenses relating to the asset purchased, as well as for determining past opportunity costs.Ex: - 100 units of an item were purchased one month back for $10 per unit. The price today is $11 per unit. The inventory shall appear on balance sheet at $1,000 and not at $1,100.

10. Principle of Full Disclosure

Full disclosure principle is relevant to materiality concept. It requires that all material information has to be disclosed

in the financial statements either on the face of the financial statements or in the notes to the financial statements.

Ex:-Accounting policies need to be disclosed because they help understand the basis of accounting.

11. Double Aspect principleThis state that there are two aspects of accounting, one represented by the assets of the business and the other by the claims against them. The concept states that these two aspect are always equal to each other. In other words, this is the alternate form of the accounting equation:Assets=Liabilities CapitalDouble aspect concept is known as "Double Entry Book Keeping System".

12. Modifying principleThere is a modifying principle in accounting when:There are two or more generally accepted accounting principles that apply to a particular situation, and you shift to the other principle; orWhen the accounting principle that former applied to the situation is no longer generally accepted; or change the method of applying the principle.

13. Principles of materialityThe materiality principle is the magnitude of an omission or misstatement in an entity's financial statements that makes it probable that a reasonable person relying on those financial statements would have been influenced by the omitted information or made a different judgment if the correct information had been known. Under generally accepted accounting principles (GAAP), you do not have to implement the provisions of an accounting standard if an item is immaterial. This definition does not provide definitive guidance in distinguishing material information from immaterial information, so you must exercise judgment in deciding if a transaction is material.

14. Principle of ConsistencyThe consistency principle states that, once you adopt an accounting principle or method, you should continue to follow it consistently in future accounting periods. You should only change in accounting principle or method if the new version in some way improves reported financial results. if you make such a change, you should fully document its effects, and include this documentation in the notes accompanying the financial statements.

15. Principle of Conservation or Prudent

Accounting transactions and other events are sometimes uncertain but in order to be relevant we have to report

them in time. We have to make estimates requiring judgment to counter the uncertainty. While making judgment we

need to be cautious and prudent. Prudence is a key accounting principle which makes sure that assets and income are

not overstated and liabilities and expenses are not understated.

Ex:-Bad debts are probable in many businesses, so they create a special contra-account to accounts receivable called

allowance for bad debts which brings the accounts receivable balance to the amount which is expected to be realized

and hence prevents overstatement of assets. An expense called bad debts expense is also booked to stop net income

from being overstated.

References

1. Business Entity Concept. [Online] available from: http://www.accountingtools.com/questions-and-answers/what-is-the-business-entity-concept.html [Accessed 05 March 2013]

2. Going Concern Concept. [Online] available from: http://accountingexplained.com/financial/principles/going-concern [Accessed 06 March 2013]

3. Money measurement concept. [Online] available from: http://www.accountingtools.com/questions-and-answers/what-is-the-money-measurement-concept.html [Accessed 06 March 2013]

4. Basic Accounting Concept [Online] available from: http://www.tutebox.com/3090/business/accounting/basic-accounting-concepts/[Accessed 06 March 2013]

5. Revenue recognition principle [Online] available from: http://www.accountingtools.com/revenue-recognition-principle [Accessed 06 March 2013]

6. Matching Principle [Online] available from: http://www.businessdictionary.com/definition/matching-principle.html#ixzz2Mqg2WzaY [Accessed 06 March 2013]

7. Historical cost principle [Online] available from: http://www.businessdictionary.com/definition/historical-cost-principle.html#ixzz2Mqii9t4U [Accessed 06 March 2013]

8. Daul Aspect Concept [Online] available from: http://wiki.answers.com/Q/What_is_the_dual_aspect_concept [Accessed 06 March 2013]

9. Materiality principle [Online] available from: http://wiki.answers.com/Q/What_is_the_dual_aspect_concept [Accessed 06 March 2013]

10. Conservation of prudence [Online] available from: http://wiki.answers.com/Q/What_is_the_dual_aspect_concept [Accessed 06 March 2013]