10/10/2025
📘 Accounting Concepts – Fundamental Assumptions
💠 1. Business Entity Concept
Business and owner are treated as separate entities.
Personal transactions are not mixed with business.
Logical Reason: Helps identify true business profit or loss.
Example: Owner’s withdrawal is called Drawings, not an expense.
💠 2. Going Concern Concept
Business is assumed to continue in the future.
Assets are recorded at cost, not liquidation value.
Logical Reason: No need to revalue every year — continuity is assumed.
Example: Machinery depreciated over useful life, not sold immediately.
💠 3. Money Measurement Concept
Only transactions measurable in money are recorded.
Non-monetary items (like staff skill) are not recorded.
Logical Reason: Money provides a common measuring unit.
Example: ₹50,000 salary is recorded; employee honesty isn’t.
💠 4. Accounting Period Concept
Business life is divided into equal time periods (usually a year).
Helps to measure profit periodically.
Logical Reason: Continuous life of business must be broken into reporting periods.
Example: Financial year – April 1 to March 31.
💠 5. Cost Concept
Assets are recorded at their original purchase cost, not market value.
Logical Reason: Ensures objectivity and reliability of records.
Example: Land bought for ₹5 lakh stays in books at ₹5 lakh even if its market value is ₹10 lakh.
💠 6. Matching Concept
Expenses are matched with the revenues of the same period.
Logical Reason: Shows true profit for that period.
Example: Depreciation for the year charged before computing profit.
💠 7. Dual Aspect Concept
Every transaction has two sides – Debit and Credit.
Logical Reason: Maintains balance in the equation → Assets = Liabilities + Capital.
Example: Bought furniture ₹10,000 → Asset increases, Cash decreases.
💠 8. Consistency Concept
Same accounting methods are used every year.
Logical Reason: Makes comparison between years meaningful.
Example: If you use Straight-Line Depreciation, continue it next year too.
💠 9. Conservatism (Prudence) Concept
Anticipate losses, not profits.
Logical Reason: Avoids overstating assets or income.
Example: Create provision for doubtful debts, but not for possible future gains.
💠 10. Accrual Concept
Record income and expenses when earned or incurred, not when cash is received or paid.
Logical Reason: Reflects true financial performance for the period.
Example: Rent outstanding is still an expense for the year.
✨ Follow Accounts Classes by Karthick Balaraman
