Like it or not, accounting is the language used in business. Accounting information is used to communicate the affairs of a business unit to others as well as to those who own or manage it. This information must be suitably recorded, classified, summarized and presented. Accounting makes use of several concepts to make the language convey the same meaning to all people, as far as practicable and to make it full of meaning. A few of them are given below:
First, the Business Entity Concept. From the viewpoint of accounting, a business is different from the person who owns it. This allows the recording of transactions of the business with the proprietor. Without this difference, affairs of this nature will not be available.
Second, is the Cost Concept. Transactions are entered in the book of accounts, including the amounts actually involved. Suppose a firm purchases a piece of land for $5000 but considers it to be worth $6000. The purchase will be recorded $5000 and not any more.
This is one of the most important ideas in accounting - it prevents arbitrary values being put on transactions, especially those, which involve the acquisition of assets. This also means that the amount to be recorded is objectively arrived at because of the mutual agreement of the two parties involved.
Sometimes it is inevitable that accountants have to be content with just a rough estimate, especially when what is included is the amount of depreciation to be charged each year in respect of things, which tend to depreciate. Obviously, the amount can only be an estimate because the future life of the machinery cannot be exactly computed.
Third is the Money Measurement Concept. Accounting records only those transactions, which are expressed in monetary terms, though quantitative records are also kept. An event, even though important, like a quarrel between the production manager and the sale manager, will not be recorded unless its monetary effect can be measured with a fair degree of accuracy.
First, the Business Entity Concept. From the viewpoint of accounting, a business is different from the person who owns it. This allows the recording of transactions of the business with the proprietor. Without this difference, affairs of this nature will not be available.
Second, is the Cost Concept. Transactions are entered in the book of accounts, including the amounts actually involved. Suppose a firm purchases a piece of land for $5000 but considers it to be worth $6000. The purchase will be recorded $5000 and not any more.
This is one of the most important ideas in accounting - it prevents arbitrary values being put on transactions, especially those, which involve the acquisition of assets. This also means that the amount to be recorded is objectively arrived at because of the mutual agreement of the two parties involved.
Sometimes it is inevitable that accountants have to be content with just a rough estimate, especially when what is included is the amount of depreciation to be charged each year in respect of things, which tend to depreciate. Obviously, the amount can only be an estimate because the future life of the machinery cannot be exactly computed.
Third is the Money Measurement Concept. Accounting records only those transactions, which are expressed in monetary terms, though quantitative records are also kept. An event, even though important, like a quarrel between the production manager and the sale manager, will not be recorded unless its monetary effect can be measured with a fair degree of accuracy.
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