Accounting Concepts & Conventions: Business Entity, Money Measurement, Going Concern and Dual Aspect Concepts

Get unlimited access to the best preparation resource for IEO : Get full length tests using official NTA interface: all topics with exact weightage, real exam experience, detailed analytics, comparison and rankings, & questions with full solutions.

Download PDF of This Page (Size: 114K)

Accounting Concepts

Accounting concepts is basically referring to the basic rules and principles which work as a basis of recording of business transactions and preparation of accounting records for an organisation. The major accounting concepts are as follows:

  • Business Entity concept

  • Money Measurement concept

  • Going concern concept

  • Dual aspect concept

Business Entity Concept

According to this concept, business is treated as a separate entity from its owners. The business records only those transactions which are not personal in nature. All the transactions are recorded in the books of accounts from the point of view of the business. eg. When capital is provided by the owner, the accounting record will show the business as having received so much money and as owing to the owner. Be it sole proprietorship, partnership or joint stock company, business is treated as a separate entity.

Money Measurement Concept

Money measurement concept explains that all the business transactions must be in the form of monetary in nature. Transactions which cannot be expressed in money terms do not find place in the books of accounts. Non-monetary terms such as, birth, experience etc. are not recorded in the books.

Going Concern Concept

The concept states that an organisation will continue to carry its business activities for an indefinite period of time, that implies every business entity has a continuity of life. It also has an intention that, nor to liquidate the concern in the foreseeable future. eg. When a branch of an organisation liquidates, the ability of that particular branch ceases, but the parent concern will be considered as a going concern unless it has filled for the liquidation in the court of law.

Dual Aspect Concept

  • The Dual aspect concept based on the principle that; every business transaction has to be recorded simultaneously the books in two places. Modern accounting is based on the dial aspect concept. This concept is fundamentally based upon the accounting equation: Assets = Liabilities + Capital

  • The above-mentioned equation has an equal impact on assets and liabilities in such a way that total assets are always equal to total liabilities. It helps in detecting errors in the future course of operation. Also reduces the burden at the time of preparation of the financial statements in the future.

Accounting Conventions

Accounting conventions are basically universally followed practices for the recording of the financial transactions in the books of accounts. These are some standard setup customs has to be followed by the accounting community for reporting as well as recording of the transactions. It helps in comparing accounting data of different business units or of the same unit of different periods. In the practical world, the financial statements are prepared to the following accounting conventions:

Conventions of Consistency

The concept of consistency implies that same accounting principles should be maintained for preparing financial statements from one year to another, which helps the organisation to compare the financial positions over a period of time. The different principle adherence would make the organisation more troublesome in the future. eg. For depreciation calculation there are several methods are available, such as: straight method and written down value method. If an organisation has followed straight method one year and changed to the other method in the next year, that will create serious issue at the time of ascertaining the financial position of the concern.

Conventions of Materiality

This convention implies that, the accountant should report only what is material and ignore insignificant details which is not relevant while preparing of the final accounts. It helps in preparing a meaningful financial statement and also reduces errors by saving the valuable time of the accountants. The recording of the material transactions is completely depending upon the personal experience and judgement of the accountant.

Conventions of Conservatism

Convention of conservatism is based on the principle that the accountant should not anticipate future profit but provide for all possible future losses. The prime objective of this convention is to show minimum profit which should not be overstated. More disclosure of profit leads to distribution of dividend out of the capital, which leads to reduction of capital of the organisation. This convention helps to ascertaining the actual profit and also helps in maintaining the capital at its real value. eg. Provision for making doubtful debts, stock valuation in hand at lower cost or market value and amortization of intangible assets.

Developed by: