Accounting Concepts and Principles

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Introduction to Accounting Explained – Lect.2

  TOPIC LIST

  • Accounting concepts and principles introductory  
  • The going concern notion
  • The business entity concept
  • Accruals basis of accounting  
  • Dual aspect concept
  • Accounting period concept
  • Materiality and Consistency 
  • Separate valuation principle
  • Money Measurement Concept

Accounting Concepts And Principles Introductory  

 In preparation of financial information ,certain fundamental Concepts and  principles  are taken into consideration as a framework. 

During the  Preparation of  those accounts  , there should  be an accounting treatments through which accounting principles and  concepts are applied , the General Accepted Accounting Principles  (GAAP) provides  the  standardized methodology for recording  business transactions and events , so we have  chosen to explain  for you the most   possible accounting principles and  concepts which could be  used  to build up  an accounting framework  as Expressed  below:

The going concern notion

 The going concern notion signifies that the business has  to  continue  working in a long period of time status  towards future  projection .

there should not be  an intention to put the  business into liquidation  or  stop operating

The business entity concept

This concept says  that accountants and Financial Managers must  take  a business as a separate entity, distinct from its owners or officers . 

Example. Suppose Mrs. Ketty initiated   a business  by investing Rwf 200,000. She purchased goods for Rwf 60,000  Office Chairs for Rwf40,000 and machinery of Rwf50,000. Rwf 50,000 remains in hand. It  means that all  that above are  the  assets of the business and not of the owner.

Accruals basis of accounting

The accrual  basis  states  that , the accounting  transactions  and  other events are recognized when they occur , while in the  cash basis ,the transactions are recorded  when cash has been received or paid.  Transaction  must be recorded and reported in the  period to which they are related. 

Dual aspect concept

From this Concept , every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. the transaction should be recorded at two places. 

For example : Goods Sold for cash has two aspects : 

*Giving of Good (Decrease in Stock which is   Asset of  the business )      

                                               AND     

 *Receiving of Cash (Increase in revenue which is Equity of the business

Accounting period concept

 This   concept states that all the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be determined for a specified period. 

Also this concept requires that a balance sheet and profit and  loss account should be prepared at regular intervals so  that it will help   for different purposes like, calculation of profit, determining Financial position, tax computation etc.

Materiality and Consistency

 Under Materiality ,the only material items should appear in the financial statements and the  items are  material if their omission or misstatement would influence the  decision of the  primary  users of the  financial  statements.  

While consistency states that similar items should be accorded similar accounting treatment ,then in preparing  accounts consistency  should be observed where the  same treatment should be applied from one  period  to another in accounting items  because this will be  helpful in comparing  one  period  of accounting to another. 

Separate valuation principle

 In determining the amount to be attributed to an asset or liability in the balance sheet, each component item of the asset or liability must be determined separately.

 Then after, the  figures obtained from these  separate valuations  must be  arrived  in the Balance sheet.

 For example, if a company’s  stock comprises 100 separate items, esch will be  evaluated separately; the 100 figures must then be aggregated and the total stock figure  will  be  appearing   in the   Balance sheet.

Money Measurement Concept

 The money Measurement  state that  , transactions  recorded   by the  business in the  books of accounts  should expressed and measured in monetary value, 

For example:  If the entity pays the employee some salary then the payment of salary will be a transaction to be measured  in terms of money, otherwise it is nothing of any sort.

End  of  Lecture 


 54 All the time,  1 To day

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