Question

Specify the meaning of each of the eight key accounting concepts used in economic calculation from the standpoint of the entrepreneur. How are they subsequently used by the entrepreneur?

Answer 1

Accounting Principles lay down guidelines on which accounting concepts are built to impart uniformity in the preparation of financial statements.

The key eight accounting concepts used in economic calculation and their subsequent usage from standpoint of the entrepreneur are as follows:

1. Cost Concept: The fixed assets are recorded into the books of accounts at their purchase price which includes the cost of acquisition, transportation, and installation. Cost means the cost incurred for acquiring new assets and original cost minus depreciation for the used assets. All the calculations are carried out at the cost of purchase only. The market price of fixed assets is not recorded in the books of accounts. An entrepreneur records assets at their purchase price on the assets side of the balance sheet which shows the yearly value of assets. It helps an entrepreneur in knowing the total value of assets in a particular year and in the time to come.

2. Business Entity Concept: Also known as Economic Entity Concept implies that there is a separate entity of business from its owner. Business and the owner are two distinct persons having a separate identity. If an entrepreneur brings in capital or invests money to start a business, it will be recorded as liability of the business on the liabilities side of the balance sheet.

3. Matching Concept: The expenses related to a particular income must be entered in books of accounts in that very period. For a particular entry of revenue reported in a given period, and equal entry of expense has to be reported for computing profit/loss in that very period. For example, labor cost and capital cost, etc. incurred in production activity in a particular year should be reported in the same year in which production activity has resulted in sales. It will help an entrepreneur in calculating the profit or loss of his business correctly every year.

4. Money Measurement Concept: The transactions which can be expressed in monetary terms are recorded in the financial statements. For example, in a production function fixed and variable costs are expressed in monetary forms, therefore, are recorded in the books of accounts. The entrepreneur records profit earned, a loss incurred, income or revenue generated and rent paid, etc. expressed in money form in the financial statements.

5. Going Concern Concept: This concept implies that a business will continue to operate or carry out its production activities in the future indefinitely, meaning thereby that, the business will not stop operating suddenly. The entrepreneur makes a purchase of assets for the lifetime of a business and therefore, records part of its value as expenditure in the purchasing year and the remaining value as an asset in the balance sheet.

6. Accounting Period Concept: According to Going Concern Concept, a business will continue its activities for an indefinite period in the future. So, an entrepreneur divides the longer life of a business into shorter periods called accounting periods, to calculate the profitability of his business.

1. Realization Concept: The profit from a production activity is recognized when it is actually earned. For example, the sale of goods is considered as realization and mere receiving of order for production cannot be termed as realization. For example, when an entrepreneur receives an order for the manufacturing of units it cannot be termed as the realization of revenue.
2. Full Disclosure Concept: The relevant or important information will be disclosed in the financial statements by the entrepreneur. Investors make investment decisions after analyzing financial statements. Therefore, information of utmost importance will not be kept hidden from the statements for the growth of the business. The accounting concepts are adopted by each and every entrepreneur in his business for the lifetime to comply with the rules and regulations for the preparation of financial statements. These can not be ignored or avoided by any entrepreneur. For the survival of any business, its compilation is necessary.