It was the duty of the management to utilise such funds properly and the reports of the financial accounting were designed to project how best the management discharged this stewardship function. preliminary expenses, expenses in connection with the issue of shares and debentures, advertisement expenses etc., cannot be easily identified and matched against revenues of a particular period. In short, Assets = Equities. Therefore, two accounts are to be passed in the books of accounts, one—for receiving the benefit and the other—for giving the benefit. Since they are held in a ‘going concern’ for earning revenue and not for resale, there is no such utility to show the expected realisable values in the Balance Sheet. Login details for this Free course will be emailed to you, This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. On the other hand, when an advanced payment is made by a customer, the same cannot be treated as revenue realised or earned. Though there are a number of practical difficulties, Cost Concept Method still serves as a fair and adequate basis for the valuation of assets. Therefore, total costs and expenses pertaining to the generation of such revenue together with the expenses and cost incurred for the specific accounting period are matched against the revenue for the said period. There should always be some documentary evidences in establishing the truth reflected in the said reports or statements. Unearned/Unrealised revenue should not be taken into account. It should be remembered that cost of fixed asset is not taken but only the depreciation on such fixed asset related to the accounting period is taken (For the purpose of matching, prepaid expenses are excluded from the total costs but outstanding expenses are added to the total cost for ascertaining the cost related to the period.) As a result, transactions should be recorded in the books of accounts with such persons and individuals together with the owners. Application of matching concept creates some problems which are: (a) Some special items of expenses, e.g. The segregation of expenditure between capital and revenue arises from this concept. The performance of a period is measured by matching cost with revenue. Let’s say that Company A has reported that it has a machinery worth of $60,000 as its cost. Thus, there will be a double entry for every transaction—Debit for receiving the benefit and Credit for giving the benefit. This method suffers from the following limitations: (a) It does not recognise the changes in the purchasing power of monetary unit. Here is how the system is applied: Ascertain the Type of Account. The Historical Cost Concept needs support of two other concepts for practical purposes, viz. Accounting needs all values to be recorded in terms of a single monetary unit. Errors of principle, and; Clerical Errors Errors of Omission; Errors of Commission; Compensating Errors. Content Guidelines 2. Like costs, all revenues earned during the period are not taken, but revenue which are related to the accounting period are considered. The types of accounts viz. Assets = Equities (or, liabilities + capital) is based on this concept. goods, service, natural resources etc. For every type of entity, whether it is large in size or small in size, it is very important to have a proper system of accounting for proper management of an entity’s business operations. In other words, revenue realised (either by sale of goods or by rendering services) during an accounting period should only be taken in the income statement (Profit and Loss Account). For this purpose, expenses which are specially incurred for earning the revenue of the related period are to be considered. The market value of the asset is not to be taken into consideration for the purpose of valuation or depreciation of such asset. Balance Sheet Equation Concept 10. According to this concept, revenue is considered as earned on the date when it is realised. So, accounting helps to express heterogeneous economic activities in terms of money. The following points highlight the ten major types of accounting concepts. Practical difficulties arise by identifying business affairs of a group of companies under common management. It expresses that accounting data are subject to verification by independent experts, i.e., there must be documentary evidences of transactions which are capable of verification. The asset, when it is acquired, is originally recorded at its cost price and gradually reduced by way of depreciation. Otherwise, the same will neither be verifiable nor be realisable or dependable. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy. As per this principle, a company should disclose all financial information to help the readers see the company transparently. Financial accounting. As per the accrual principle, the sales should be recorded during the period, not when the money would be collected. As such, accurate matching is not possible. A system known as the Generally Accepted Accounting Principles defines four basic assumptions, four basic principles and four basic constraints to business accounting. Here, the equation comes : (That is, in other words, every debit must have a corresponding equal credit or vice versa.) But this does not mean that the business entity has a perpetual life. Realisation Concept 9. Conservatism principle. That is why Accounting Period Concept plays a very significant role in accounting. Accounting is both science and art. This method is closely related to the ‘Going Concern Concept’ method. Sometimes half-yearly or quarterly period is also taken into consideration. Yet, for accounting purposes, it is the best means for measuring varied transactions, e.g. Therefore, golden rules of accounting were devised. The Accounting Period Concept recognises division and appropriation of accounting records into specific periods. An accountant must have a good understanding of the terms used in accounting and types of accounts. This concept recognises that the determination of profit or loss on a particular accounting period is a problem of matching the expired cost allocated to an activity period. Disclaimer 9. As a result, expenditures which are carried forward and not related to the income received may create some problems. Let’s have a look at them –. That is, a sole trader is personally liable for his business debts and may be required to use non-business (Personal) assets in order to pay-off the business debts. Plagiarism Prevention 4. The best-known of these principles are as follows: Accrual principle. Decrease. Assigning values to goods and items therefore becomes a problem since it is subjective. Conservatism principle encourages the accountant to report more significant liability amount, lesser asset amount, and also a lower amount of net profits. Amount of depreciation is to be calculated on the basis of its cost prices and the effective life of the asset. Consequently, the manager of the firm was supplied with the necessary funds by the owners and the lenders. The same is known as equity in the business. Privacy Policy 8. When an asset is acquired or purchased, its cost price is the only source by which the basis for all subsequent accounting in relation to the same can be made. 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