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These concepts guide how business transactions are reported. On the basis of the four assumptions the following concepts (principles) of accounting have been developed.
Dual Aspect Concept
Dual aspect principle is the basis for Double Entry System of book-keeping. All business transactions recorded in accounts have two aspects - receiving benefit and giving benefit. For example, when a business acquires an asset (receiving of benefit) it must pay cash (giving of benefit).
For example, if we buy some stock, then it will have two effects:
- the value of stock will increase (get benefit for the same amount), and
- it will increase our liability in the form of creditors.
Transaction |
Effect |
Purchase of Stock for Rs 25,000 |
Stock will increase by Rs 25,000 (Increase in debit balance)
Cash will decrease by Rs 25,000 (Decrease in debit balance)
Or
Creditor will increase by Rs 25,000 (Increase in credit balance) |
Revenue Realisation Concept
According to this concept, revenue is considered as the income earned on the date when it is realised. Unearned or unrealised revenue should not be taken into account. The realisation concept is vital for determining income pertaining to an accounting period. It avoids the possibility of inflating incomes and profits.
Historical Cost Concept
Under this concept, assets are recorded at the price paid to acquire them and this cost is the basis for all subsequent accounting for the asset. For example, if a piece of land is purchased for Rs.5,00,000 and its market value is Rs.8,00,000 at the time of preparing final accounts the land value is recorded only for Rs.5,00,000. Thus, the balance sheet does not indicate the price at which the asset could be sold for.
Matching Concept
Matching the revenues earned during an accounting period with the cost associated with the period to ascertain the result of the business concern is called the matching concept. It is the basis for finding accurate profit for a period which can be safely distributed to the owners.
Full Disclosure Concept
Accounting statements should disclose fully and completely all the significant information. Based on this, decisions can be taken by various interested parties. It involves proper classification and explanations of accounting information which are published in the financial statements.
Verifiable and Objective Evidence Concept
This principle requires that each recorded business transactions in the books of accounts should have an adequate evidence to support it.
For example, cash receipt for payments made. The documentary evidence of transactions should be free from any bias. As accounting records are based on documentary evidence which are capable of verification, it is universally acceptable. |
