Concepts of Accounting with Types of Entities

We have already mentioned Accounting Concepts or Principles in our previous blog. Let us explain them in detail one by one.

Business Entity Concept

Accounts can only be kept only for entities, which are different from the persons who are associated with these entities. For example - Partnership Firm and Company. This is one of the most important and fundamental accounting principles with which the Double Entry System of Accounting has evolved. Accounts need to be maintained separately from the owners and providers of capital. If you understand the simple logic, then you know 30% of accounting.

Money Measurement Concept

The record should be made only of that information which can be expressed in monetary terms i.e. Currency Value (USD, INR, GBP...etc).

A normal doubt which comes to our mind in the first and fourth example from the above image that how to get the value. We should not be taking the Purchase Value, but we should take the Market Value on the date of transferring the Assets to Business. This is an exception to Cost Concept only in case of transfer to another business. Another example -

Dual Aspect Concept

The value of the Assets owned by the concern is equal to the claims on the Assets. Let us divide this sentence into a formula -

ASSETS = LIABILITIES + OWNER'S EQUITY

OWNER'S EQUITY = ASSETS - LIABILITIES

LIABILITIES = ASSETS - OWNER'S EQUITY

Below is one of the examples -

With the help of the above formula, you can calculate this example.

Cost Concept

Assets are always shown at their own cost and not at their current Market Value. The examples are given below -

Accounting Period

Accounting measures activity for a specified interval of time, usually a year. For Example -

Choosing the accounting period is the entity's choice, but there are legal rules like the Companies Act and Income Tax Act that prescribes the period in which the entity has to report to them. Remember still entities can have different accounting periods for their own Internal Management Reporting. A company in India can have Company Law purpose (Jan-Dec) year and Income Tax purpose (Apr-May) year and for own Internal Reporting (Jul - Jun) year.

Conservatism

Anticipate no profits but provide for all possible losses. Accountants are by nature conservative and also protect the interest of the shareholders and creditors to provide for all losses. For example -

Realization Concept

The sales are considered to have taken place only when either the cash is received or some third party becomes legally liable to pay the amount. Revenues are recognized when they are earned or realized. Realization is assumed to occur when the seller receives cash (receivables) in exchange for goods and services.

Matching Concept

When an event affects both the revenues and expenses, the effect on each should be recognized in the same accounting period. Following are the examples -

Materiality Concept

Insignificant events would not be recorded if the benefit of recording them does not signify the cost. The concept is in need in conjunction with accounting events which signifies the transaction into Capital, Revenue, and Deferred Revenue Expenditure. Example -

Objectivity Concept

Evidence of the happening of the transaction should support every transaction in the form of paper. External evidence is considered to be more authenticated proof than Internal evidence. This rule is more important from an Audit perspective as auditors always consider and bound to get more external evidence than internal evidence. Examples are -

Finally, we can talk about the types of entities which are -

Now, in our next blog, we will be explaining details of Accounting Conventions or Practices.