BASIC ASSUMPTION CONCEPTS/PRINCIPLES/CONVENTIONS

   BASIC ASSUMPTION CONCEPTS/PRINCIPLES/CONVENTIONS

I. Separate Entity Concept or Entity Concept or business entity concept Business Entity Concept considered business enterprises as a separate Entity & having separate identity distinct from its owner. Therefore business transactions are recorded in the books of accounts from business point of view and not from the owner. Therefore amount invested by owner into the business is also treated as liability (internal) for business.

II. Going Concern Concept :-- According to this concept, it is assumed that enterprise will continue its operation for indefinite period of time. It is assumed that an enterprise neither has intention nor the need to liquidate or wind up and curtail its scale of operation. It is because of this concept a distinction is made between assets and expense, fixed and current assets / liabilities.

III. Money Measurement Concept : -- According to this concept, only those transactions which can be expressed in money should be recorded in the books of accounts . Transactions and events, that cannot be expressed in money are not recorded in books of accounts, even if they are very useful or affect the result of business.

IV. Periodicity Concept/Accounting period concept:-- According to this concept, the life of an enterprise is broken into smaller periods so that its performance can be measured at regular interval. Generally one year period is taken up for performance measurement and appraisal of financial position. So life of the enterprise is divided into smaller periods(usually one year) which is termed as ‘accounting period.’ At the end of accounting period, we prepare financial statements.

V. Accrual Concept:-- Accrual means recognition of revenue and expenses as they are earned or incurred and not when cash or money is received or paid. Revenue means gross inflow of cash, receivables and other consideration arises in the ordinary course of business activities from sale of goods, rendering services and using other enterprises resources yielding interest, royalties and dividends. Expenses are cost relating to revenue earned for a particular period.

VI.Revenue realisation concept:- this concept speaks about recording of only those transactions which are actually realised. For example, sale will be taken into account only when cash is received or legal ownership is transferred.

VII. Matching concept : For ascertaining profit and loss for a particular period, expenses should be matched with revenue of that period. In financial statement, it is necessary to match revenue of the period with the expenses of that period to determine correct profit or loss.

VIII. Full disclosure concept : as per this concept, all significant information must be disclosed. Accounting data should properly be clarified, summarised, aggregated and explained for the purpose of presenting the financial statements which are useful for the users of accounting information.

IX. Duality concept: according to this concept every transaction has two aspects i.e. the benefit receiving aspect and benefit giving aspect. These two aspects are to be recorded in the books of accounts.

X. Verifiable objective evidence concept: under this concept, accounting data must be verifiable. It means documentary evidence of transactions must be made which are capable of verification by an independent respect.

XI. Historical cost concept : According to this concept, value of asset is determined on the basis of historical cost or acquisition cost or price paid for acquisition of asset.

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