Traditionally, financial accounting has dealt with this problem by stating that this concept assumes either that the purchasing power of the monetary unit is stable over time or that the changes in prices are not significant. The primary characteristics of the monetary unit-purchasing power, or the quantity of goods or services that money can acquire-is of concern. Secondly, the monetary measurement concept concerns the limitations of the monetary unit itself as a unit of measure. First, accounting is limited to the production of information expressed in terms of a monetary unit: it does not record and communicate other relevant but non-monetary information. Money measurement concept implies two limitations of accounting. Obviously, financial statements should indicate the money used. Money measurement concept holds that accounting is a measurement and communication process of the activities of the firm that are measurable in monetary terms. Money is the common denominator in terms of which the exchangeability of goods and services, including labour, natural resources and capital, are measured. The common denominator chosen in accounting is the monetary unit. This further implies that data communicated are tentative and that current statements should disclose adjustments to past year statements revealed by more recent developments.Ī unit of exchange and measurement is necessary to account for the transactions of business enterprises in a uniform manner. The going-concern concept leads to the proposition that individual financial statements are part of a continuous, inter-related series of statements. Also, the fixed assets and intangibles are amortised over their useful life rather than over a shorter period in expectation of early liquidation. The going-concern concept justifies the valuation of assets on a non-liquidation basis and it calls for the use of historical cost for many valuations. Because of the relative permanence of enterprises, financial accounting is formulated assuming that the business will continue to operate for an indefinitely long period in the future. It may also apply to a segment of a firm, such as division, or several firms, such as when inter-related firms are consolidated.Ī business entity is viewed as continuing in operation in the absence of evidence to the contrary. The concept applies to sole proprietorship, partnership, companies, and small and large enterprise. This concept, therefore, enables the accountant to distinguish between personal and business transactions. The transactions of the enterprise are to be reported rather than the transaction of the enterprise’s owners. Similarly, the assets and liabilities devoted to business activities are entity assets and liabilities. Consequently, the analysis of business transactions involving costs and revenue is expressed in terms of the changes in the firm’s financial conditions. The entity concept assumes that the financial statements and other accounting information are for the specific business enterprise which is distinct from its owners. The basic accounting concepts are as follows: However, these are the concepts that are widely accepted and used in practice by preparers of financial statements and by auditors while verifying such statements. Basic accounting concepts discussed herein may not be identical to those listed by other authors or groups. Nevertheless, in order to understand accounting as it now exists, one must understand the underlying concepts currently used. Some accounting researchers and theorists argue that certain of the present accounting concepts are wrong and should be changed. As stated earlier, they are regarded as self-evident. These concepts are so basic that most preparers of financial statements do not consciously think of them. Accounting principles are built on a foundation of a few basic concepts.
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