Accounting concepts and conventions form the foundation on which the entire accounting system is built. These are the rules and guidelines that ensure financial statements are consistent, comparable, and reliable.
Key Accounting Concepts: - Business Entity Concept — The business is treated as separate from its owner. Personal transactions of the owner are not recorded in business books. - Going Concern Concept — The business is assumed to continue operating indefinitely. Assets are recorded at cost, not liquidation value. - Money Measurement Concept — Only transactions measurable in monetary terms are recorded. - Dual Aspect Concept — Every transaction has two aspects (debit and credit). Assets = Liabilities + Capital. - Cost Concept — Assets are recorded at their historical cost (purchase price). - Matching Concept — Expenses of a period are matched with the revenues of that period. - Accrual Concept — Revenue and expenses are recorded when they are earned/incurred, not when cash is received/paid. - Realisation Concept — Revenue is recognised only when it is realised (goods delivered or services rendered).
Accounting Conventions: - Conservatism (Prudence) — Anticipate no profit but provide for all possible losses. - Consistency — Follow the same accounting methods from period to period. - Materiality — Report all items that are significant enough to influence decisions. - Full Disclosure — All relevant information must be disclosed in financial statements.
Exam tip: Expect 3-5 marks on identifying which concept/convention applies to a given scenario. Focus on practical application, not just definitions.