Key Accounting Concepts - Part 1 | Basics of Accounting | Little As Five Minutes

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Key Accounting Concepts -

a) Entity: This concept stated that all business organizations are treated as distinct and separate from owners or investors. Accounting records of the business organizations are maintained for the organization and not for the owners of the organization. In other words, the financial information disclosed by organizations should only pertain to the transactions or events that directly affect the workings of the organization and should not include activities that affect the owners or investors.

b) Money-Measurement: The money measurement concept states that in financial accounting, only those events or transactions that can be measured in monetary terms should be recorded. In other words, if the impact of an event or a transaction cannot be quantified in terms of money, it should not be recorded in the books of accounts
There are four generally accepted measurement bases. These are:
 Historical cost is the amount paid or payable to acquire a benefit, e.g., A Ltd. has purchased machinery for $700,000 on 1st January 2000. So, the historical cost of the machinery will be $700,000.
 The current cost is the amount to be paid if the asset is to be acquired currently. Assume in the above example that on 1st January 2003, A Ltd. found that it would cost $2,500,000 to purchase that machine. So, as per the current cost basis, the machine value will be $2,500,000
 Realizable value is the net amount collectible in the event of asset disposal.
 Net Present value is the total of the present value (discounted) of future cash flows that an asset is expected to generate in the ordinary course of business.

c) Cost: By this concept, the value of an asset is to be determined on the basis of acquisition cost. Although there are various measurement bases, accountants traditionally prefer this concept in the interests of objectivity. Other measurement bases are not so objective. The current cost of an asset is not easily determinable. If the asset is purchased on 1st January 2000 and such a model is not available in the market, it becomes difficult to determine which model is the appropriate equivalent to the existing one. Similarly, unless the machinery is actually sold, the realizable value will give only a hypothetical figure. Lastly, the present value base is highly subjective because to know the value of the asset, one has to chase the uncertain future.

d) Dual Aspect: This concept is the basis of the fundamental accounting equation:
Assets = Liabilities + Equity Assets are what organizations own. Liabilities are what the organizations owe to others against the assets Equity is the difference between assets and liabilities and represents the amount due by a business entity to its owners/investors.

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