Accounts

by P. Armstrong

Accounting Concepts and Conventions​

​Accounting Concepts and Conventions are the accounting rules that are followed when recording transactions in the books.

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​Accounting concepts -The rules that state how transactions are to be recorded.

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​Accounting conventions -These are the rules that standardize the accounting methods used to assure that similar items are dealt with in similar ways.

​Accounting concepts

T​he Cost Concept - states that assets are valued and shown in the accounts at their cost price (the amount asset is purchased for).

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​The Money Measurement Concept - states that only transactions that can be measured in monetary terms should be recorded in the books

The Going Concern Concept - states that the business is assumed to be in operation in the foreseeable future.

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​The Business Entity Concept - states that the items recorded in the business’ books are transactions that affect the business (business transactions). The owner (s)’ private transactions are kept separate from business transactions.

​The Realization Concept (Revenue Recognition Concept) - states that revenue is realized/recognized/earned and recorded as revenue when the goods or services are passed to the customers and a liability is incurred. It is NOT based on when cash has been received.

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​The Accrual Concept (Matching Concept) - states that the expenses incurred or used up in an accounting period must be matched to the revenues earned in that period, and therefore, recorded in the accounting period incurred.

​The Dual Aspect Concept - states that there are two aspects of accounting, and both aspects are always equal to each other. Assets must always equal Capital plus Liabilities (Accounting Equation). “Double entry” is the method of recording the transactions for the dual aspect concept.

​Accounting Conventions

Materiality - states that only relevant information, which has the ability to influence decisions, is reported. Small amounts are not considered material and may either not be reported, or do not have to follow accounting concepts.

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​Consistency - states that the same method should be used for the accounting treatment of similar items, and the same method should be used from year to year. If the method is changed, the change should be disclosed.

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​Prudence / Conservatism - states that, in times of uncertainty, the figure that understates profit should be reported, rather than the figure that overstates profit. Expenses should be overstated rather than understated, and revenue should be understated rather than overstated.