Also, Rs.2000 was additionally spent on its installation. An amount of Rs.2,000 was spent on transporting the machine to the factory site.
For example, a machine was purchased by ABC Limited for Rs.10,00,000, for manufacturing bottles. It implies that the fixed assets like plant and machinery, building, furniture, etc are recorded at their purchase price. The assets are not recorded at their market price. The accounting cost concept states all the business assets should be written down in the book of accounts at the price assets are purchased, including the cost of acquisition, and installation. In brief, the accrual concept states that revenue is recognized when realized and expenses are recognized when they become due and payable irrespective of the cash receipt or cash payment. For example, if the firm received goods costing Rs.20000 on March 9, 2021, but the payment is made on April 7, 2021, the accrual concept requires that expenses must be recorded for the year ending March 31, 2021, although no payment has been made until this date though the service has been received and the person to whom the payment should have been made is represented as a creditor of business firm. Similarly, expenses are recognized at the time services are provided, irrespective of the fact that cash paid for these services are made. It must be included in the revenue for the year ending March 31, 2021. For example, On March 5, 2021, the firm sold goods for Rs 55000, and the payment was not received until April 5, 2021, the amount was due and payable to the firm on the date goods and services were sold i.e. In the accounting system, the accrual concept tells that the business revenue is realized at the time goods and services are sold irrespective of the fact when cash is received for the same. Therefore, both the transactions are recorded in the accounting period in which they relate. It implies that revenue is realized at the time of sale through cash or not whereas expenses are recognized when they become payable whether cash is paid or not. The term accrual means something is due, especially an amount of money that is yet to be paid or received at the end of the accounting period. Accordingly, any expenses incurred by the owner for himself or his family from business will be considered as expenses and it will be represented as drawings. Therefore, the business entity concept states that the business and the business owner are two separate/distinct persons. This withdrawal of cash/goods by the owner from the business is his private expense and not the business expense. 5000 cash or goods for the same worth for his domestic purposes. a liability of the business towards the owner of the business. According to the business entity concept, Rs.1,00,000 will be assumed by a business as capital i.e. These are the assets of the business and not of the business owner. He purchased goods for Rs 50,000, furniture for Rs. Thus, the accounting transactions are recorded in the books of accounts from the organization's point of view and not the person owning the business. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as a business expense.
For example, when the business owner invests his money in the business, it is recorded as a liability of the business to the owner. Hence, the business translation and personal transaction of its owner are different. This concept assumes that the organization and business owners are two independent entities. What are the Different Accounting Concepts?įollowing are the different accounting concepts that are widely used all around the world and hence are termed as universally accepted accounting rules. It aims to understand the business rules and regulations that are required to be followed by all types of business entities, and hence simplifying the detailed and comparable financial information.
The primary aim of accounting is to maintain uniformity and regularity in the preparation of accounting statements.Īccounting concepts act as an underlying principle that helps accountants in the preparation and maintenance of business records. What are the Objectives of the Accounting Concept? “The term accounting concepts refer to basic rules, assumptions, and principles which act as a primary standard for recording business transactions and maintaining books of accounts”. They may be termed as accounting concepts. Similarly, there are accounting rules that an accountant should follow while recording business transactions or recording accounts. In India, there are several rules which need to be followed while walking or driving on the road as it enables the smooth flow of traffic.
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