Core Accounting Concepts

Business Entity

The business and the owner are considered separate for accounting and accounts are prepared from the business's point of view. However, the owner's transactions with the business will be recorded in the books of accounts.

Money Measurement

Only things that can be measured in money are recorded in the accounts.

Cost

At the time of purchase, assets are recorded at the price paid for them (their original cost). This value is later gradually reduced by depreciation.

Consistency

Use the same accounting methods/policies every year unless a change is necessary. Disclose such change with a note.

Conservatism

Play safe: record all possible losses, but do not count profits before they happen.

Going Concern

Assume the business will keep running for a long time.

Realization

Record income when sales take place/goods or services are delivered, not when received.

Accrual

Record income and expenses when they happen, not just when cash is transferred.

Dual Aspect

Every transaction affects two accounts in accounting (double entry).

Disclosure

Show all important information clearly in the accounts.

Materiality

Only material (important) items are shown separately; small ones can be grouped. What is material for one business can be immaterial (not important) for another business.

Matching

Match this year’s incomes with this year’s related expenses.

1

Business Entity

If the owner uses part of their house for business, only that part’s rent is written in business records.

2

Money Measurement

You can count 5 computers because you know what you paid (₹1,50,000), but you can't record “hard work.”

3

Cost

If a table was bought for ₹15,000, it’s recorded as ₹15,000, even if it now sells for less or more.

4

Consistency

If a shop uses one method to calculate depreciation, it keeps using the same method every year.

5

Conservatism (Prudence)

If stock costs ₹25,000 or could sell for ₹35,000, record it at ₹25,000, just to be safe.

6

Going Concern

A shop buys a fridge and records it for many years, expecting the business to run for a long time.

7

Realization

If you deliver goods in June, even if the customer pays in September, you record the sale in June.

8

Accrual

If you earn interest each month, but the bank pays it at year-end, you record it as you earn it.

9

Dual Aspect

If you put ₹5,000 into your business, the business gets cash and now owes you that money as capital.

10

Disclosure

If your shop has a loan, you clearly mention it in your financial report for everyone to see.

11

Materiality

Buying a single pen is not shown separately; it’s grouped with other office supplies.

12

Matching

If you record this year’s sales, you also include this year’s expenses to see if you made a profit.