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Introduction

Actually there are a number of accounting concepts and principles based on which we prepare our

accounts. These generally accepted accounting principles lay down accepted assumptions and

guidelines and are commonly referred to as accounting concepts.

Accounting Concepts and Principles are a set of broad conventions that have been devised to

provide a basic framework for financial reporting. As financial reporting involves significant

professional judgments by accountants, these concepts and principles ensure that the users of

financial information are not mislead by the adoption of accounting policies and practices that go

against the spirit of the accountancy profession. Accountants must therefore actively consider

whether the accounting treatments adopted are consistent with the accounting concepts and

principles.

In order to ensure application of the accounting concepts and principles, major accounting

standard-setting bodies have incorporated them into their reporting frameworks such as the IASB

Framework.

Following is a list of the major accounting concepts and principles

1. Concept of disclosure,

2. Going concern concept,

3. Concept of entity,

4. Concept of duality,

5. Concept of realization,

6. Concept of matching,

7. Concept of prudence,

8. Concept of consistency,

9. Cost concept,

10. Money measurement concept,

11. Concept of materiality

Major accounting concepts and principles are discussed bellow

1. Concept of disclosure

Financial statements should be prepared to reflect a true and fair view of the financial position and

performance of the enterprise. All material and relevant information must be disclosed in the

financial statements.

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.

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Examples: Accounting policies need to be disclosed because they help understand the basis of

accounting.

2. Going concern concept

The business will continue in operational existence for the foreseeable future. Financial statements

should be prepared on a going concern basis unless management either intends to liquidate the

enterprise or to cease trading, or has no realistic alternative but to do so

Going concern is one the fundamental assumptions in accounting on the basis of which financ ia l

statements are prepared. Financial statements are prepared assuming that a business entity will

continue to operate in the foreseeable future without the need or intention on the part of

management to liquidate the entity or to significantly curtail its operational activities. Therefore,

it is assumed that the entity will realize its assets and settle its obligations in the normal course of

the business.

It is the responsibility of the management of a company to determine whether the going concern

assumption is appropriate in the preparation of financial statements. If the going concern

assumption is considered by the management to be invalid, the financial statements of the entity

would need to be prepared on break up basis. This means that assets will be recognized at amount

which is expected to be realized from its sale (net of selling costs) rather than from its continuing

use in the ordinary course of the business. Assets are valued for their individual worth rather than

their value as a combined unit. Liabilities shall be recognized at amounts that are likely to be

settled.

Example: Possible losses form the closure of business will not be anticipated in the accounts .

Prepayments, depreciation provisions may be carried forward in the expectation of proper

matching against the revenues of future periods. Fixed assets are recorded at historical cost.

3. Concept of entity

The business and its owner(s) are two separate existence entity. Any private and personal incomes

and expenses of the owner(s) should not be treated as the incomes and expenses of the business

Financial accounting is based on the premise that the transactions and balances of a business entity

are to be accounted for separately from its owners. The business entity is therefore considered to

be distinct from its owners for the purpose of accounting.

Therefore, any personal expenses incurred by owners of a business will not appear in the income

statement of the entity. Similarly, if any personal expenses of owners are paid out of assets of the

entity, it would be considered to be drawings for the purpose of accounting much in the same way

as cash drawings.

The business entity concept also explains why owners' equity appears on the liability side of a

balance sheet (i.e. credit side). Share capital contributed by a sole trader to his business, for

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instance, represents a form of liability (known as equity) of the 'business' that is owed to its owner

which is why it is presented on the credit side of the balance sheet.

Examples: Insurance premiums for the owner’s house should be excluded from the expense of the

business. The owner’s property should not be included in the premises account of the business .

Any payments for the owner’s personal expenses by the business will be treated as drawings and

reduced the owner’s capital contribution in the business.

4. Concept of duality

Dual Aspect Concept, also known as Duality Principle, is a fundamental convention of accounting

that necessitates the recognition of all aspects of an accounting transaction. Dual aspect concept is

the underlying basis for double entry accounting system. In a single entry system, only one aspect

of a transaction is recognized. For instance, if a sale is made to a customer, only sales revenue will

be recorded. However, the other side of the transaction relating to the receipt of cash or the grant

of credit to the customer is not recognized.

Single entry accounting system has been superseded by double entry accounting. You may still

find limited use of single entry accounting system by individuals and small organizations that keep

an informal record of receipts and payments. Double entry accounting system is based on the

duality principle and was devised to account for all aspects of a transaction. Under the system,

aspects of transactions are classified under two main types:

Debit

Credit

Debit is the portion of transaction that accounts for the increase in assets and expenses, and the

decrease in liabilities, equity and income. Credit is the portion of transaction that accounts for the

increase in income, liabilities and equity, and the decrease in assets and expenses. The

classification of debit and credit effects is structured in such a way that for each debit there is a

corresponding credit and vice versa. Hence, every transaction will have 'dual' effects (i.e. debit

effects and credit effects). The application of duality principle therefore ensures that all aspects of

a transaction are accounted for in the financial statements.

Example: Mr. A, who owns and operates a bookstore, has identified the following transactions for

the month of January that need to be accounted for in the monthly financial statements:

Payment of salary to staff 2000tk

Salary Expense Increase in expense 2,000

Cash at bank Decrease in assets 2,000

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5. Concept of realization

Revenues should be recognized when the major economic activities have been completed. Sales

are recognized when the goods are sold and delivered to customers or services are rendered.

Realization concept in accounting, also known as revenue recognition principle, refers to the

application of accruals concept towards the recognition of revenue (income). Under this princip le,

revenue is recognized by the seller when it is earned irrespective of whether cash from the

transaction has been received or not.

Example: Goods sent to our customers on sale or return basis. This means the customer do not pay

for the goods until they confirm to buy. If they do not buy, those goods will return to us. Goods on

the ‘sale or return’ basis will not be treated as normal sales and should be included in the closing

stock unless the sales have been confirmed by customers

6. Concept of matching

Revenues are recognized when they are earned, but not when cash is received. Expenses are

recognized as they are incurred, but not when cash is paid. The net income for the period is

determined by subtracting expenses incurred from revenues earned.

Matching Principle requires that expenses incurred by an organization must be charged to the

income statement in the accounting period in which the revenue, to which those expenses relate,

is earned.

Example: Expenses incurred but not yet paid in current period should be treated as accrual/accrued

expenses under current liabilities. Expenses incurred in the following period but paid for in

advance should be treated as prepayment expenses under current asset. Depreciation should be

charged as part of the cost of a fixed asset consumed during the period of use.

7. Concept of prudence

Revenues and profits are not anticipated. Only realized profits with reasonable certainty are

recognized in the profit and loss account. However, provision is made for all known expenses and

losses whether the amount is known for certain or just an estimation. This treatment minimizes the

reported profits and the valuation of assets.

Prudence requires that accountants should exercise a degree of caution in the adoption of policies

and significant estimates such that the assets and income of the entity are not overstated whereas

liability and expenses are not under stated.

The rationale behind prudence is that a company should not recognize an asset at a value that is

higher than the amount which is expected to be recovered from its sale or use. Conversely,

liabilities of an entity should not be presented below the amount that is likely to be paid in its

respect in the future.

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Example: Stock valuation sticks to rule of the lower of cost and net realizable value. The provision

for doubtful debts should be made. Fixed assets must be depreciated over their useful economic

lives.

8. Concept of consistency

Companies should choose the most suitable accounting methods and treatments, and consistent ly

apply them in every period. Changes are permitted only when the new method is considered better

and can reflect the true and fair view of the financial position of the company. The change and its

effect on profits should be disclosed in the financial statements.

Consistency concept is important because of the need for comparability, that is, it enables investors

and other users of financial statements to easily and correctly compare the financial statements of

a company.

Examples: If a company adopts straight line method and should not be changed to adopt reducing

balance method in other period. If a company adopts weight-average method as stock valuation

and should not be changed to other method e.g. first-in-first-out method.

9. Cost concept

Assets should be shown on the balance sheet at the cost of purchase instead of current value.

Accounting is concerned with past events and it requires consistency and comparability that is why

it requires the accounting transactions to be recorded at their historical costs. This is called

historical cost concept.

Historical cost is the value of a resource given up or a liability incurred to acquire an asset/service

at the time when the resource was given up or the liability incurred.

In subsequent periods when there is appreciation is value, the value is not recognized as an increase

in assets value except where allowed or required by accounting standards.

Example:

i. The cost of fixed assets is recorded at the date of acquisition cost. The acquisition cost

includes all expenditure made to prepare the asset for its intended use. It included the

invoice price of the assets, freight charges, and insurance or installation costs.

ii. Stock valuation sticks to rule of the lower of cost and net realizable value. The provision

for doubtful debts should be made. Fixed assets must be depreciated over their useful

economic lives.

The concept of historical cost is important because market values change so often that allowing

reporting of assets and liabilities at current values would distort the whole fabric of accounting,

impair comparability and makes accounting information unreliable.

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10. Money measurement concept

All transactions of the business are recorded in terms of money. It provides a common unit of

measurement.

Money Measurement Concept in accounting, also known as Measurability Concept, means that

only transactions and events that are capable of being measured in monetary terms are recognized

in the financial statements.

Examples: Market conditions, technological changes and the efficiency of management would not

be disclosed in the accounts.

11. Concept of materiality

Immaterial amounts may be aggregated with the amounts of a similar nature or function and need

not be presented separately. Materiality depends on the size and nature of the item.

Information is material if its omission or misstatement could influence the economic decisions of

users taken on the basis of the financial statements. Materiality therefore relates to the significance

of transactions, balances and errors contained in the financial statements. Materiality defines the

threshold or cutoff point after which financial information becomes relevant to the decision making

needs of the users. Information contained in the financial statements must therefore be complete

in all material respects in order for them to present a true and fair view of the affairs of the entity.

Materiality is relative to the size and particular circumstances of individual companies.

Example: Small payments such as postage, stationery and cleaning expenses should not be

disclosed separately. They should be grouped together as sundry expenses. The cost of small-

valued assets such as pencil sharpeners and paper clips should be written off to the profit and loss

account as revenue expenditures, although they can last for more than one accounting period.

There are many other accounting concepts and principles those are given bellow

Relevance Concept

Reliability Concept

Timeliness Concept

Concept of Neutrality

Faithful Representation Concept

Completeness Concept

Single Economic Entity Concept

Understandability Concept

Accruals Concept

Substance over Form Concept