Basic Accounting Concepts

Business Entity Concept/Accounting Entity Concept

According to this concept, the business is considered as a separate business entity from its owner(s). Thus the financial information of the business will be recorded and reported separately from its owner’s personal financial information.

Going Concern

For accounting purposes, it is assumed that the business will operate for an indefinite period of time and thus considered as ‘going concern’. For this reason, the realizable value of the property owned by business will not be relevant.

Money Measurement

Only those transactions will be recorded in the financial books which can be measured in terms of money. Anything which cannot be measured in monetary terms will not be considered as a part of the accounting data.

Historical Cost

All assets will be recorded at their cost price. This means that machinery purchased years ago will be recorded at its original cost of purchase even though its value is lower now.
The reason for doing so is because the business is considered as a going concern and we need not be worried about the saleable value of the asset.

Accounting Period

The life a business is considered to be indefinite. But for accounting purposes, the life of the business is divided into specified periods of time. The period may be a month, a half year, a full year or any length of time.

Accrual Concept

Accrual concept states that revenue is recognized when it is earned and expenses when they are incurred.
Any income or revenue generated must be recorded in the books of accounts whether the payment for it is received or not. Similarly, any expense done by the business should be recorded irrespective of the fact that the business has paid for it or not.


Any transaction which is recorded in the accounting books should be verifiable. In other words, the transaction should backed by some proof in the form of a receipt, invoice, cheque, voucher etc.


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