Business entity concept
The business is a distinct accounting entity, separate from its owners.
Examples:
- The owner’s personal car purchase is not recorded in the business’s books.
Money measurement concept
Only information expressible in monetary terms is recorded.
Examples:
- Employee skill and brand reputation are not recorded, since neither can be reliably expressed in money.
Historical cost concept
Assets are shown at cost, not current market value.
Examples:
- Land bought 10 years ago for 50,000, even if its current market value is $200,000.
Periodic concept
Income or loss is measured over a fixed accounting period, e.g. calendar year (1 Jan to 31 Dec) or financial year (1 April to 31 March).
Examples:
- A company closes its books every 31 March and reports that year’s profit, regardless of projects still in progress.
Matching concept
Expenses incurred in a period are matched with the revenue earned in that period.
Examples:
- Commission owed for a sale made in March is recorded as a March expense, even if paid out in April.
Materiality concept
Information is material iff its misstatement could influence the economic decisions of users.
Examples:
- A $2 stationery purchase is expensed immediately instead of depreciated, since tracking it changes no decision.
Going concern concept
The business is assumed to continue operating for the foreseeable future.
Examples:
- Machinery is valued as a productive asset in use, not at its forced-sale liquidation price.
Consistency concept
Accounting methods are applied uniformly across periods.
Examples:
- A company using straight-line depreciation continues with it every year, instead of switching methods to alter reported profit.
Accrual concept
Accounts are prepared on an accrual basis by default, though some entities use cash basis.
Examples:
- A sale made in December is recorded as December revenue, even if cash is received in January.
Realization concept
Revenue is realized when goods or services are actually delivered.
Prudence concept
Assets or profits are not overstated, and losses are not understated.
Examples:
- Recognize provision for trade receivable impairment.
- Recognize stock losses.
- Recognize gratuity provision expenses.