1. Business entity concept
The transactions of a business are to be kept separate from those of its owners. By doing so, there is no intermingling of personal and business transactions in a company’s financial statements.
2. Going concern concept
Financial statements are prepared on the assumption that the business will remain in operation in future periods.
3. Consistency concept
Once a business chooses to use a specific accounting method, it should continue using it on a go-forward basis. By doing so, the financial statements prepared in multiple periods can be reliably compared.
4. Money Measurement Concept
Business transactions can only be recorded in terms of their monetary value.
5. Conservatism concept
Revenues are only recognized when there is a reasonable certainty that they will be realized, whereas expenses are recognized sooner, when there is a reasonable possibility that they will be incurred. This concept tends to result in more conservative financial statements.
6. Dual Aspect Concept
Each transaction has two aspects. When a business acquires an asset, it has to pay money. Acquiring an asset and paying money are two sides of the coin. Similarly, if the asset is acquired through credit, there arises a liability to that extent. Thus if there is an increase in asset, there will be increase in liability also.
Capital = Assets-Liabilities
7. Cost Concept
The transactions are recorded keeping in mind the actual cost involved and this concept does not consider the projected value or appreciation.
8. Matching concept
The expenses related to revenue should be recognized in the same period in which the revenue was recognized. By doing this, there is no deferral of expense recognition into later reporting periods, so that someone viewing a company’s financial statements can be assured that all aspects of a transaction
have been recorded at the same time
