Basic Accounting Principles

Think about this: What keeps accountants across the world speaking the same “financial language”? Why do two companies prepare their accounts in such a comparable way? The answer lies in Accounting principles, Postulates, and Concepts. These are the backbone that keeps financial reporting consistent, reliable, and trustworthy.

Principles, Postulates, and Concepts

Students often confuse these three terms, so let’s sort them out once and for all:

So, postulates are the foundation, concepts are the ideas, and principles are the actionable rules. Together, they form the accounting framework.

Major Accounting Concepts & Principles

a. Going Concern Concept

The going concern concept assumes that the business will continue its operations in the foreseeable future. This assumption influences how we value assets. If the business were closing tomorrow, we’d value assets at their liquidation price, but since it’s “going,” we use historical cost or book value.

Illustration: Suppose a company owns a machine purchased for ₹10,00,000 with a useful life of 10 years. Under going concern, we record depreciation every year and continue to show the asset on the balance sheet at cost minus accumulated depreciation — not at its resale value today.

b. Accrual Concept

Under the accrual concept, income and expenses are recognized when they are earned or incurred — not when cash changes hands. This concept is why credit sales and outstanding expenses are recorded.

Numerical Example: If rent of ₹20,000 for March is unpaid at year-end, it is still recorded as an expense in March’s accounts. This ensures true profit is calculated for the period.

c. Matching Concept

This concept ensures that expenses are matched with the revenues they helped generate. It prevents overstating or understating profits.

Example: If a company spends ₹1,20,000 on machinery expected to last 10 years, it doesn’t charge the full ₹1,20,000 in year one. Instead, it charges ₹12,000 each year as depreciation, matching the expense with the revenue earned during that period.

d. Dual Aspect Concept

This is the very heartbeat of accounting. It says that every transaction has two aspects: a giving side (credit) and a receiving side (debit). It’s the reason why the basic accounting equation holds true:

Assets = Liabilities + Capital

Illustration: If you invest ₹5,00,000 to start a business, assets (cash) increase by ₹5,00,000, and capital increases by ₹5,00,000. Both sides remain equal.

e. Business Entity Concept

Business and owner are treated as separate entities for accounting purposes. Even if the owner is the sole proprietor, the business’s books are kept independent.

Example: If the proprietor withdraws ₹50,000 for personal use, it is recorded as Drawings and reduces capital — not as a business expense.

Other Key Concepts Worth Noting

• Money Measurement Concept: Only transactions measurable in money are recorded. A hardworking employee’s loyalty cannot be recorded as an asset.
• Accounting Period Concept: Life of a business is divided into equal time periods (usually one year) for reporting profit/loss.
• Cost Concept: Assets are recorded at their purchase price, not market value, unless revaluation is specifically done.

Key Points

• Going Concern assumes indefinite continuation of business.
• Accrual recognizes income/expenses when earned/incurred, not cash basis.
• Matching ensures proper measurement of profit by relating costs to revenues.
• Dual Aspect → foundation of double-entry system.
• Business Entity → keeps owner’s personal transactions out of books.
• Money Measurement → only monetary transactions are recorded.
• Accounting Period → divides life of business into reporting intervals.

Question: Which concept is violated when the owner’s personal electricity bill is paid through business cash and recorded as business expense?

Answer: Business Entity Concept.

Summary