(a) What is Accounting concept? (b) Explain the following accounting concepts: (i) Business Entity Concept (ii) Accrual Concept (iii) Going Concern Concept ...

(a) What is an accounting concept?

An accounting concept is a basic assumption, rule or principle that underlies the recording and reporting of business transactions. Accounting concepts guide accountants so that financial statements are prepared on a uniform, consistent and acceptable basis.

(b) Explanation of the concepts

• (i) Business entity concept: the business is treated as separate and distinct from its owner. Only the transactions of the business, and not the private affairs of the owner, are recorded in its books.
• (ii) Accrual concept: revenues and expenses are recognised in the period in which they are earned or incurred, not necessarily when cash is received or paid. Adjustments are made for accruals and prepayments.
• (iii) Going concern concept: the business is assumed to continue in operation for the foreseeable future, and is not about to be wound up or drastically reduced in scale. Assets are therefore not valued at break-up prices.
• (iv) Consistency concept: the same accounting methods and policies are applied from one period to the next, so that results can be meaningfully compared; any change should be disclosed.
• (v) Periodicity (time interval) concept: the continuous life of the business is divided into definite, equal periods (usually one year) for which accounts are prepared and reported.
• (vi) Historical cost concept: assets and transactions are recorded at their original acquisition cost, rather than at current or market value.