Underlying Accounting Concepts
There are five underlying accounting concepts, which are reinforced through custom and practice:
- Historical cost concept: Assets are recorded at cost price within financial statements.
- Money measurement concept: Accounting information is concerned only with those facts which can be measured in monetary units and most people would agree to the value of the transaction. (This means that accounting can’t tell us everything about a business e.g. whether it has good managers or whether there are potential staffing problems).
- Business entity concept: Affairs of a business are to be treated separately from the affairs of its owners. The affairs of a business’ owners can affect the business is when they introduce capital or take drawings from it.
- Dual aspect concept: This concept states that the assets of the business are equal to the claims against the business (including the amount of capital owed to shareholders). This is an alternate way of stating the Accounting Equation (Assets = Capital + Liabilities). Double entry bookkeeping is the name given to the method of recording transactions under the dual aspect concept.
- Time interval concept: Financial statements are produced at regular intervals of one year. Many organisations choose to produce monthly statements for internal purposes.