The whole Bookkeeping planet depends on certain basic accounting concepts. These are the accounting standard. GAAP is the Generally Accepted Accounting Principles which should be followed by all the big and small enterprises.
Every entrepreneur should have the knowledge about the concepts and implementation of basic accounting principles for preparing financial reports.
Below are the basic concepts that every business follows:
Here we will be discussing some underlying concepts used in the field of Bookkeeping. These are the significant concept to be followed while preparing financial statements. Based on the same an auditor verifies the accounting statements.
- Entity Concept:
This is the business Entity concept which tells the business and the owner is two different entities. The financial reports of the business are distinct from its entrepreneur. The business profit can be ascertained through recording the business transactions. The owner has nothing to do with the business affairs.
- Going-Concern Concept:
This concept is all about the continuity of the business. All the financial accounting and regulations are framed keeping in mind that the business will continue to operate for a longer period of time in the future. So the fixed and intangible assets are valued for an expected life of longer period rather than an early liquidation.
- Money Measurement Concept:
Every business records only the quantified transactions. These are the business transactions which can be measured in terms of money. So to record each and every business transaction we need a unit of exchange for measurement. As per the accounting standard money is considered as a common denominator for exchange ability of goods and services. All the business expenses including natural resources, labor and capital are also measured in terms of money.
- Accounting Period Concept:
The financial report prepared by the enterprise should be for a particular period of time. For example, the income statement of a business is prepared for one financial year. Many organizations generate reports for a different time period like weekly, monthly or quarterly basis. You can make out the time period mentioned on the financial statement. Often for customized managerial use some financial statements are prepared on demand for a required time. This is all about the Accounting Period Concept.
- Cost Concept:
This concept tells about the business practice where all the assets of the business are recorded at their exchange price. It is the historical cost or the acquisition cost of that particular asset. In bookkeeping, every business transactions are measured in terms of the cost price. So do not get confused with that. The amount of the assets shown in the financial statement may not be the market price of the asset on the date. The amounts at which assets are listed are only the cost price of the asset.
- Dual-Aspect Concept:
Dual-Aspect Concept is the most important concept of the whole accounting process. As per the bookkeeping rules, every business transaction has minimum two aspects. Each transaction affects two parties. For example, if the owner starts the business with a new capital then the two accounts which are going to be affected are firstly the business capital account and secondly the bank account. Thus no business transactions are there which do not have a dual aspect.
The aforesaid accounting concepts are very important and depict the standard of accounting which every enterprise has to comply with. Your financial statements are of no use in the industry if all these concepts are not followed appropriately.
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