The accounting principles, concepts and conventions form the basis for how business transactions are recorded. A number of principles, concepts and conventions are developed to ensure that accounting information is presented accurately and consistently. Some of these concepts are briefly described in the following sections.
- Revenue Realization : According to Revenue Realization concept, revenue is considered as the income earned on the date, when it is realized. As per this concept, unearned or unrealized revenue is not considered. This concept is vital for determining income pertaining to an accounting period. It reduces the possibilities of inflating incomes and profits.
- Matching Concept: As per this concept, Matching of the revenues earned during an accounting period with the cost associated with the respective period to ascertain the result of the business concern is carried out. This concept serves as the basis for finding accurate profit for a period which can be distributed to the owners.
- Accrual: Under Accrual method of accounting, the transactions are recorded when earned or incurred rather when collected or paid i.e., transactions are recorded on the basis of income earned or expense incurred irrespective of actual receipt or payment. For example, a seller bills the buyer at the time of sale and treats the bill amount as revenue, even though the payment may be received later.
- Going Concern: As per this assumption, the business will exist for a long period and transactions are recorded from this point of view.
- Accounting Period: The users of financial statements required periodical reports to ascertain the operational and the financial position of the business concern. Thus, it is essential to close the accounts at regular intervals. viz., 365 days or 52 weeks or 1 year is considered as the accounting period.
- Accounting Entity: According to this assumption, a business is considered as a unit or entity apart from its owners, creditors and others. For example, in case of a Sole Proprietor concern, the proprietor is treated to be separate and distinct from the business, which he controls. The proprietor is treated as a creditor to the extent of his capital and all the business transactions are recorded in the books of accounts from the business standpoint.
- Money Measurement: In accounting, only business transactions and events of financial nature are recorded. Only transactions that can be expressed in terms of money are recorded.
