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Various Accounting Concepts and Conventions


Business entity Concept 

A business is treated as a separate entity that is distinct from its owner (s) If this assumption is not followed, the financial status and operating results of a business entity cannot be ascertained.  In other words a distinction should be made between (i) personal transaction and business transactions, and (ii) transactions of one business entity and transactions of another business entity.

Monetary unit assumption


Only those transactions which are capable of being expressed in terms of money are included in the accounting records. For example if the sale director is not on in speaking terms with the production director, the enterprise is bound to suffer. Since monetary measurement is not possible, this fact is not recorded.

This assumption also ignores the changes in the purchasing power of the monetary unit. In other words, this assumption treats all rupees alike, whether it is rupee of 1950 or 2013.

Accounting period assumption (Periodicity/Time Period)

The economic life of an enterprise is artificially split into periodic intervals which are known as accounting periods at the end of which an income statement and position statement are prepared to show the performance and financial position. The use of this assumption further requires the allocation of expenses between capital and revenue.

That portion of capital expenditure which is consumed during the current period is charged as an expense to income statement and the unconsumed portion is shown in the balance sheet as an asset for future consumption. Truly speaking measuring the income following the concept of accounting period is more an estimate than factual since actual income can be determined only on the liquidation of the enterprise.

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