THEORY BASE OF ACCOUNTING
ACCOUNTING PRINCIPLES
Accounting Principles are the basic rules and guidelines followed while recording, classifying,
and presenting financial transactions. They ensure that financial statements are reliable,
consistent, and comparable.
BUSINESS ENTITY CONCEPT
Meaning: According to this concept, business and its owner are treated as separate entities
for accounting purposes. All business transactions of financial nature, including transactions
with the owners are recorded in the books of the business.
Example: if a sole trader withdraws money from the business for personal use, it is recorded
as drawings by the owner
All payments to owners are recorded as repayment of capital or drawings or loan or distribution
of profits.
GOING CONCERN CONCEPT
Meaning: According to this principle, It is assumed that the business will continue operating for
the foreseeable future. Because of this assumption, assets are recorded based on their
continued use rather than liquidation value.
Example: Historical cost of the fixed assets is recovered throughout their useful life by way of
charging depreciation. This is based on the assumption that the business continues for the
foreseeable future.
MONEY MEASUREMENT CONCEPT
Meaning: According to this only transactions that can be expressed in monetary terms are
recorded. The money measurement concept excludes all business transactions and events
which cannot be measured in terms of money. Thus, quality of the products, value of killed
labour force, working conditions, production policies, disputes etc., cannot be recorded in
accounts in spite of their importance to the business. The concept is invaluable in summarising
business operations, assets and liabilities.
Example: Employees’ skills are not shown in the balance sheet.
ACCOUNTING ENTITY CONCEPT
Meaning: The life of a business is divided into regular accounting periods for preparing
financial statements. Accounting period concept is the basis for segregation of capital
expenditure from revenue expenditure. All expenses whose benefit is derived within the
accounting period are revenue expenses. All incomes pertaining to the period are revenue
ACCOUNTING PRINCIPLES
Accounting Principles are the basic rules and guidelines followed while recording, classifying,
and presenting financial transactions. They ensure that financial statements are reliable,
consistent, and comparable.
BUSINESS ENTITY CONCEPT
Meaning: According to this concept, business and its owner are treated as separate entities
for accounting purposes. All business transactions of financial nature, including transactions
with the owners are recorded in the books of the business.
Example: if a sole trader withdraws money from the business for personal use, it is recorded
as drawings by the owner
All payments to owners are recorded as repayment of capital or drawings or loan or distribution
of profits.
GOING CONCERN CONCEPT
Meaning: According to this principle, It is assumed that the business will continue operating for
the foreseeable future. Because of this assumption, assets are recorded based on their
continued use rather than liquidation value.
Example: Historical cost of the fixed assets is recovered throughout their useful life by way of
charging depreciation. This is based on the assumption that the business continues for the
foreseeable future.
MONEY MEASUREMENT CONCEPT
Meaning: According to this only transactions that can be expressed in monetary terms are
recorded. The money measurement concept excludes all business transactions and events
which cannot be measured in terms of money. Thus, quality of the products, value of killed
labour force, working conditions, production policies, disputes etc., cannot be recorded in
accounts in spite of their importance to the business. The concept is invaluable in summarising
business operations, assets and liabilities.
Example: Employees’ skills are not shown in the balance sheet.
ACCOUNTING ENTITY CONCEPT
Meaning: The life of a business is divided into regular accounting periods for preparing
financial statements. Accounting period concept is the basis for segregation of capital
expenditure from revenue expenditure. All expenses whose benefit is derived within the
accounting period are revenue expenses. All incomes pertaining to the period are revenue
