ACCOUNTING CONCEPTS, CONVENTIONS & PRINCIPLES

GAAP Generally Accepted Accounting Principles

An accounting standards board established by the institute of Chartered Accountants in India formulates
certain accounting principles which have to be adopted while preparing statements.
Various concepts used in accounting are:
1. Going Concern Concept it is assumed while preparing financial statements that the business
will continue for a fairly long period of time. This is why, the business purchases fixed assets. If
the concept of going concern may not have been there, we would have hired these assets and not
purchased.
2. Separate Entity Concept/ Business Entity Concept In accounting business is considered to be
a separate entity from the proprietor or partners. In case of Joint Stock Companies distinction is
made both from legal and accounting point of view.
3. Money Measurement Concept Accounting records only those transactions which can be
measured in monetary terms. Transactions & events which cant be measured in monetary terms
are not recorded in books of accounts. For eg. Quality of a sales person can not be recorded in
books of account while the amount of sales done by the same sales person can be recorded in
books of account.
4. Cost Concept According to this concept, an asset is ordinarily entered in the accounting
records at the price paid to acquire it and is the basis for all subsequent accounting for the asset.
This concept is also called historical because the balances of assets and liabilities are carried
forward from year to year at its acquisition cost, irrespective of increase or decrease in market
value.
5. Dual Aspect Concept Every business transaction has double effect. There are two sides of
every transaction. If there is seller then there must be a purchaser also.
6. Accounting Period Concept The life of a business is divided into segments usually a year to
ascertain the profit and loss and financial position of the business. Such a segment is called an
accounting period. A proper distinction has to be made between capital and revenue expenses.
7. Revenue Recognition (Realisation) Concept According to this concept, revenue is recognized
to be made at the point when property is goods passes to the buyer and he becomes legally liable
to pay. Eg. Mr. X receives an order but sales will be recognized only after goods are delivered.
8. Matching Concept In order to ascertain the profit made by the business during a period, it is
necessary that revenues of the period should be matched with the cost or expenses of that period.
On account of this concept, adjustments are made for all outstanding expense and unearned
incomes while preparing the accounts at the end of accounting period.