Accounting concepts and principles provide a framework for financial reporting and ensure users are not misled. Some key concepts are: - Going concern assumes the business will continue operating indefinitely. - Entity treats the business and its owners separately. - Duality means every transaction has two aspects recorded. - Realization recognizes revenue when goods/services are delivered. - Matching recognizes revenue and expenses in the periods to which they relate.

1. Page 1 of 6
Introduction
Actually there are a number of accounting concepts and principles based on which we prepare our
accounts. These generally accepted accounting principles lay down accepted assumptions and
guidelines and are commonly referred to as accounting concepts.
Accounting Concepts and Principles are a set of broad conventions that have been devised to
provide a basic framework for financial reporting. As financial reporting involves significant
professional judgments by accountants, these concepts and principles ensure that the users of
financial information are not mislead by the adoption of accounting policies and practices that go
against the spirit of the accountancy profession. Accountants must therefore actively consider
whether the accounting treatments adopted are consistent with the accounting concepts and
principles.
In order to ensure application of the accounting concepts and principles, major accounting
standard-setting bodies have incorporated them into their reporting frameworks such as the IASB
Framework.
Following is a list of the major accounting concepts and principles
1. Concept of disclosure,
2. Going concern concept,
3. Concept of entity,
4. Concept of duality,
5. Concept of realization,
6. Concept of matching,
7. Concept of prudence,
8. Concept of consistency,
9. Cost concept,
10. Money measurement concept,
11. Concept of materiality
Major accounting concepts and principles are discussed bellow
1. Concept of disclosure
Financial statements should be prepared to reflect a true and fair view of the financial position and
performance of the enterprise. All material and relevant information must be disclosed in the
financial statements.
Full disclosure principle is relevant to materiality concept. It requires that all material information
has to be disclosed in the financial statements either on the face of the financial statements or in
the notes to the financial statements.

2. Page 2 of 6
Examples: Accounting policies need to be disclosed because they help understand the basis of
accounting.
2. Going concern concept
The business will continue in operational existence for the foreseeable future. Financial statements
should be prepared on a going concern basis unless management either intends to liquidate the
enterprise or to cease trading, or has no realistic alternative but to do so
Going concern is one the fundamental assumptions in accounting on the basis of which financial
statements are prepared. Financial statements are prepared assuming that a business entity will
continue to operate in the foreseeable future without the need or intention on the part of
management to liquidate the entity or to significantly curtail its operational activities. Therefore,
it is assumed that the entity will realize its assets and settle its obligations in the normal course of
the business.
It is the responsibility of the management of a company to determine whether the going concern
assumption is appropriate in the preparation of financial statements. If the going concern
assumption is considered by the management to be invalid, the financial statements of the entity
would need to be prepared on break up basis. This means that assets will be recognized at amount
which is expected to be realized from its sale (net of selling costs) rather than from its continuing
use in the ordinary course of the business. Assets are valued for their individual worth rather than
their value as a combined unit. Liabilities shall be recognized at amounts that are likely to be
settled.
Example: Possible losses form the closure of business will not be anticipated in the accounts.
Prepayments, depreciation provisions may be carried forward in the expectation of proper
matching against the revenues of future periods. Fixed assets are recorded at historical cost.
3. Concept of entity
The business and its owner(s) are two separate existence entity. Any private and personal incomes
and expenses of the owner(s) should not be treated as the incomes and expenses of the business
Financial accounting is based on the premise that the transactions and balances of a business entity
are to be accounted for separately from its owners. The business entity is therefore considered to
be distinct from its owners for the purpose of accounting.
Therefore, any personal expenses incurred by owners of a business will not appear in the income
statement of the entity. Similarly, if any personal expenses of owners are paid out of assets of the
entity, it would be considered to be drawings for the purpose of accounting much in the same way
as cash drawings.
The business entity concept also explains why owners' equity appears on the liability side of a
balance sheet (i.e. credit side). Share capital contributed by a sole trader to his business, for

3. Page 3 of 6
instance, represents a form of liability (known as equity) of the 'business' that is owed to its owner
which is why it is presented on the credit side of the balance sheet.
Examples: Insurance premiums for the owner’s house should be excluded from the expense of the
business. The owner’s property should not be included in the premises account of the business.
Any payments for the owner’s personal expenses by the business will be treated as drawings and
reduced the owner’s capital contribution in the business.
4. Concept of duality
Dual Aspect Concept, also known as Duality Principle, is a fundamental convention of accounting
that necessitates the recognition of all aspects of an accounting transaction. Dual aspect concept is
the underlying basis for double entry accounting system. In a single entry system, only one aspect
of a transaction is recognized. For instance, if a sale is made to a customer, only sales revenue will
be recorded. However, the other side of the transaction relating to the receipt of cash or the grant
of credit to the customer is not recognized.
Single entry accounting system has been superseded by double entry accounting. You may still
find limited use of single entry accounting system by individuals and small organizations that keep
an informal record of receipts and payments. Double entry accounting system is based on the
duality principle and was devised to account for all aspects of a transaction. Under the system,
aspects of transactions are classified under two main types:
 Debit
 Credit
Debit is the portion of transaction that accounts for the increase in assets and expenses, and the
decrease in liabilities, equity and income. Credit is the portion of transaction that accounts for the
increase in income, liabilities and equity, and the decrease in assets and expenses. The
classification of debit and credit effects is structured in such a way that for each debit there is a
corresponding credit and vice versa. Hence, every transaction will have 'dual' effects (i.e. debit
effects and credit effects). The application of duality principle therefore ensures that all aspects of
a transaction are accounted for in the financial statements.
Example: Mr. A, who owns and operates a bookstore, has identified the following transactions for
the month of January that need to be accounted for in the monthly financial statements:
Payment of salary to staff 2000tk
Salary Expense Increase in expense 2,000
Cash at bank Decrease in assets 2,000

4. Page 4 of 6
5. Concept of realization
Revenues should be recognized when the major economic activities have been completed. Sales
are recognized when the goods are sold and delivered to customers or services are rendered.
Realization concept in accounting, also known as revenue recognition principle, refers to the
application of accruals concept towards the recognition of revenue (income). Under this principle,
revenue is recognized by the seller when it is earned irrespective of whether cash from the
transaction has been received or not.
Example: Goods sent to our customers on sale or return basis. This means the customer do not pay
for the goods until they confirm to buy. If they do not buy, those goods will return to us. Goods on
the ‘sale or return’ basis will not be treated as normal sales and should be included in the closing
stock unless the sales have been confirmed by customers
6. Concept of matching
Revenues are recognized when they are earned, but not when cash is received. Expenses are
recognized as they are incurred, but not when cash is paid. The net income for the period is
determined by subtracting expenses incurred from revenues earned.
Matching Principle requires that expenses incurred by an organization must be charged to the
income statement in the accounting period in which the revenue, to which those expenses relate,
is earned.
Example: Expenses incurred but not yet paid in current period should be treated as accrual/accrued
expenses under current liabilities. Expenses incurred in the following period but paid for in
advance should be treated as prepayment expenses under current asset. Depreciation should be
charged as part of the cost of a fixed asset consumed during the period of use.
7. Concept of prudence
Revenues and profits are not anticipated. Only realized profits with reasonable certainty are
recognized in the profit and loss account. However, provision is made for all known expenses and
losses whether the amount is known for certain or just an estimation. This treatment minimizes the
reported profits and the valuation of assets.
Prudence requires that accountants should exercise a degree of caution in the adoption of policies
and significant estimates such that the assets and income of the entity are not overstated whereas
liability and expenses are not under stated.
The rationale behind prudence is that a company should not recognize an asset at a value that is
higher than the amount which is expected to be recovered from its sale or use. Conversely,
liabilities of an entity should not be presented below the amount that is likely to be paid in its
respect in the future.

5. Page 5 of 6
Example: Stock valuation sticks to rule of the lower of cost and net realizable value. The provision
for doubtful debts should be made. Fixed assets must be depreciated over their useful economic
lives.
8. Concept of consistency
Companies should choose the most suitable accounting methods and treatments, and consistently
apply them in every period. Changes are permitted only when the new method is considered better
and can reflect the true and fair view of the financial position of the company. The change and its
effect on profits should be disclosed in the financial statements.
Consistency concept is important because of the need for comparability, that is, it enables investors
and other users of financial statements to easily and correctly compare the financial statements of
a company.
Examples: If a company adopts straight line method and should not be changed to adopt reducing
balance method in other period. If a company adopts weight-average method as stock valuation
and should not be changed to other method e.g. first-in-first-out method.
9. Cost concept
Assets should be shown on the balance sheet at the cost of purchase instead of current value.
Accounting is concerned with past events and it requires consistency and comparability that is why
it requires the accounting transactions to be recorded at their historical costs. This is called
historical cost concept.
Historical cost is the value of a resource given up or a liability incurred to acquire an asset/service
at the time when the resource was given up or the liability incurred.
In subsequent periods when there is appreciation is value, the value is not recognized as an increase
in assets value except where allowed or required by accounting standards.
Example:
i. The cost of fixed assets is recorded at the date of acquisition cost. The acquisition cost
includes all expenditure made to prepare the asset for its intended use. It included the
invoice price of the assets, freight charges, and insurance or installation costs.
ii. Stock valuation sticks to rule of the lower of cost and net realizable value. The provision
for doubtful debts should be made. Fixed assets must be depreciated over their useful
economic lives.
The concept of historical cost is important because market values change so often that allowing
reporting of assets and liabilities at current values would distort the whole fabric of accounting,
impair comparability and makes accounting information unreliable.

6. Page 6 of 6
10.Money measurement concept
All transactions of the business are recorded in terms of money. It provides a common unit of
measurement.
Money Measurement Concept in accounting, also known as Measurability Concept, means that
only transactions and events that are capable of being measured in monetary terms are recognized
in the financial statements.
Examples: Market conditions, technological changes and the efficiency of management would not
be disclosed in the accounts.
11.Concept of materiality
Immaterial amounts may be aggregated with the amounts of a similar nature or function and need
not be presented separately. Materiality depends on the size and nature of the item.
Information is material if its omission or misstatement could influence the economic decisions of
users taken on the basis of the financial statements. Materiality therefore relates to the significance
of transactions, balances and errors contained in the financial statements. Materiality defines the
threshold or cutoff point after which financial information becomes relevant to the decision making
needs of the users. Information contained in the financial statements must therefore be complete
in all material respects in order for them to present a true and fair view of the affairs of the entity.
Materiality is relative to the size and particular circumstances of individual companies.
Example: Small payments such as postage, stationery and cleaning expenses should not be
disclosed separately. They should be grouped together as sundry expenses. The cost of small-
valued assets such as pencil sharpeners and paper clips should be written off to the profit and loss
account as revenue expenditures, although they can last for more than one accounting period.
There are many other accounting concepts and principles those are given bellow
 Relevance Concept
 Reliability Concept
 Timeliness Concept
 Concept of Neutrality
 Faithful Representation Concept
 Completeness Concept
 Single Economic Entity Concept
 Understandability Concept
 Accruals Concept
 Substance over Form Concept