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![]() ![]() A lot of external users depend on these financial statements for their information to make investing decisions. This concept states that all relevant information will be disclosed in the accounting statements. So costs are matched with revenue, the reverse would be an incorrect system. First, the revenue is recognized and then we match the costs associated with the revenue. The matching accounting concept follows the realization concept. So to determine the income of a period all the revenues and expenses (whether paid or not) must be included. This concept states that the revenue and the expenses of a transaction should be included in the same accounting period. What is Systems and Basis of Accounting? 8] Matching Concept And we assume this revenue as realized only when it legally arises to be received. So in simpler terms, the profit earned will be recorded when it is actually earned. Now revenue is the cash inflow for a business arising from the sale of goods or services. 7] Realisation ConceptĪccording to the realization accounting concept, revenue is only recognized when it is realized. And also the Balance Sheet will stay balanced. And so the transaction will have a dual effect in accounting. But at the same time, the bank or cash balance will reduce by 10,000/. So now the Fixed Assets of the company will increase bt 10,000/. Say the business buys an asset worth Rs 10,000/. So let us see an example of this in action. This is the core concept of the double-entry system of accounting. So every transaction we record must have a two-fold effect, i.e. It basically is one of the golden rules of accounting – for every credit, there must be a corresponding debit. This concept is the basic principle of accounting, it is the heart and soul. Browse more Topics Under Theory Base Of Accounting The market price of the asset is not taken into consideration. In the subsequent years to, the price remains the same (minus depreciation charged). ![]() This accounting concept states that all assets of the firm are entered into the books of account at their purchase price (cost of acquisition + transport + installation etc). Also in most cases, it is also a statutory requirement. This facilitates a comparison of performances and allows stakeholders to get timely information. So the indefinite life of an organization is divided into shorter, generally equal time period. The time period is mentioned in the financial statements. Generally, the time chosen is a year we call the accounting year. 4] Accounting Period ConceptĮvery organization, according to its needs, chooses a specific period of time to complete an accounting cycle. The current statements are tentative and only reflect the financial position of that particular period of time. So it justifies the financial statements as a part of a continuous series of statements. This leads to the assumption that the business will not have to sell its assets any time soon and it will meet all its obligations as well. So it assumes that for the foreseeable future the business will not be winding up. The going concern concept assumes that a business will continue to operate indefinitely. This concept is actually one of the major drawbacks of accounting.ĭo you know Accounting Standards, GAAP and IFRS ? 3] Going Concern Concept So for example, if the company underwent a major management overhaul this would have no effect on the accounting records. Any other transaction, no matter how significant, will not find a place in the financial accounts. So only those business activities that can be expressed in monetary terms will be recorded in accounting. This accounting concept states that only financial transactions will find a place in accounting. So for example, if the owner brings in additional capital into the business, we will treat this as a liability on the balance sheet of the business. All forms of business organizations (proprietorship, partnership, company, AOP, etc) must follow this assumption. This will help the accountant identify the business transactions from the personal ones. As far as accounting is concerned the owner and the business are two separate entities. This accounting concept separates the business from its owner. These thirteen accounting concepts find wide acceptance across the world by accounting professionals and auditors. And these accounting principles are built on a few assumptions that we call accounting concepts. There are some accounting equations that support these too. Financial Accounting both practical and theory-based is built on some accounting principles. ![]()
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