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  Concepts of Financial Accounting

Concepts of Financial Accounting:-

The concepts of financial accounting are as follow:

A. Separate Entity

 This concept describes that the businessman is dissimilar from business. So if X starts his business termed as X and Sons, X as a person shall be dissimilar from his firm, that is X and Sons. In fact in Law, separate entity concept is identified only in the case of joint stock companies registered within Companies Act, 1956. In case of partnerships and sole proprietorship business, separate entity concept is not identified within Law. Though in accounting, separate entity concept is identified and the accounting entries are passed in the books of the business and not in the books of the proprietor that type of. So when X initiates his business and invests his own money as capital, it is displayed as liability in the Balance Sheet of the business. Alternatively, if the proprietor acquires any private expenditure from the resources of the business, it is displayed as recoverable in the books of accounts of the business. So the principle of separate entity is applied in practice.

B. Double Entry

This principle can be termed as 'Heart' of the whole accounting mechanism. The meaning of double entry is 'a transaction is recorded at two places in the books of accounts, the cause being that any transaction has two fold effects and therefore it is to be recorded at two places'. The following instance will make clear the point.

1. The cash goes out and goods come in, if goods are purchased for cash. So one influence is the cash going out and the second influence is that goods come in.

2. While goods are sold for cash, the first influence is that the cash comes in and the second influence is that the goods are going out.

3. In case of credit transactions such as purchase of goods, one influence is that goods come in and the person from whom the goods are purchased becomes the creditor of the business. So in double entry system, each and every transaction has the two fold effects. There is other system of recording the transactions that is termed as single entry system. In single entry system, each transaction is recorded only one time and therefore no double effect is provided.

There are extremely few organizations in which single entry system is still implemented. Though, the double entry system is now being accepted in all places.

C. Money Measurement Concept

Other significant concept of financial accounting is the money measurement concept. The meaning of this concept is that only the transactions that are capable of being expressed in monetary terms will be kept in the books of accounts. In other words, transactions that cannot be expressed in monetary terms cannot be kept in the books of accounts. For instance, in books of accounts monetary value of assets or goods will be kept and not the quantity of the same. Furniture will not be kept like 1 table or 12 chairs or 100 cupboards, but the values of the same in monetary terms will be kept.

The meaning of this principle is that items such as Human Resources will not be kept in the books of accounts because they cannot be converted into monetary terms. This principle is significant because it brings uniformity in recording transactions in the books of accounts.

D. Going Concern Concept

According to the Glossary of terms, International Accounting Standards, in year 1999, the definition of 'Going Concern' is as follows 'That enterprise is generally viewed like a going concern which is as continuing in operation for the predictable future. It is supposed that the enterprise has neither the intention nor the requirement of liquidation or curtailing materially the scale of its operations.' The implementation of this idea is that the financial statements, fixed assets are displayed at the cost of acquisition less depreciation accumulated up to the date of closure. The reason behind that is, it is supposed that the enterprise is going continuously for a long period of time and there is no intention to close it down in the near future. So the market values of similar are not applicable at all, the cost prices are applicable and hence the assets should be displayed at the cost value.

E. Matching Concept

Matching of costs and revenues idea is described in the International Accounting Standards 'Expenses are identified in the income statement on the source of a direct association among the costs acquired and the earnings of particular items of income. This process includes the concurrent or combined recognition of revenues and expenses which result directly and jointly from similar association or other events. Though, the application of the matching concept does not permit the recognition of items in the Balance Sheet that do not meet the definition of assets or liabilities.'

Other words, the meaning of matching concept is it is essential to periodically match the costs and revenues to observe the results of a specific period. This period is termed as accounting year. For every business it is necessary to find out the profit or loss after periodic intervals. In fact, real profit or loss can be observed only after the business is closed down. But in the previous concept we have observed that any business organization is a going concern and not probable to shut down in the near future. So it is essential to match the revenue and expenditure on periodic basis. This period is generally for one year and is termed as accounting year. In example of limited companies established within the Companies Act, 1956, 1st accounting year in case of a company can be of one and half year but consequent accounting years must be of one year duration. A business organization is free to choose the accounting year that is a calendar year can be adopted like accounting year or financial year starting from 1st April to 31st March could be an accounting year. The assessment year for income tax reason is all the time from 1st April to 31st March and therefore many organizations adopt this period like accounting year.

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