Accounting Concepts In Accounting

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Recommended: Historical background of accounting

The Accounting Concepts
1. Introduction to accounting principles
Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts. The main objective is to maintain uniformity and consistency in accounting records. These concepts constitute the very basis of accounting. All the concepts have been developed over the years from experience and thus they are universally accepted rules.
2. Underlying accounting concepts
Historical Cost Concept
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 recognised as an increase in assets value except where allowed or required by accounting standards.
Examples
1. 100 units of an item were purchased one month back for $10 per unit. The price today is $11 per unit. The inventory shall appear on balance sheet at $1,000 and not at $1,100.
2. The company built its ERP in 2008 at a cost of $40 million. In 2010 it is estimated that the present value of the future benefits attributable to the ERP is $1 billion. The ERP shall stand on balance sheet at its historical costs less accumulated depreciation.

Time Interval Concept
Time Interval Concept, in accounting, requires that financial statements be prepared at regular intervals, e.g. monthly, quarterly, annually.

Money Measurement Concept
The mo...

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... differs from its real substance, accounting should show the transaction in accordance with its real substance, i.e., how the transaction affects the economic situation of the business.

4. The Difference between Underlying Accounting Concepts and Fundamental Accounting Concepts
Fundamental accounting concepts and underlying concepts are different in that the primary concepts are upon what the fundamental ones are based. They are the basis upon which the fundamental ones are derived. However, they are different because underlying concepts are merely understood assumptions among accountants, whereas fundamental concepts are specific rules that accountants follow.

5. Conclusion
In conclusion accounting concepts are essential to every organization that adheres to the strict guidelines of the concepts in order to provide a better transparency to the general public.

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