Accounting Concepts.

Accounting Concepts:-

INTRODUCTION

Let us imagine a situation where you are a proprietor and you take copies of your books of account to ve 

di erent accountants. You ask them to prepare the nancial statements on the basis of the above records 

and to calculate the pro ts of the business for the year. After few days, they are ready with the nancial 

statements and all the ve accountants have calculated ve di erent amounts of pro ts and that too with 

very wide variations among them. Guess in such a situation what impact would it leave on you about 

accounting profession. To avoid this, a generally accepted set of rules have been developed. This generally 

accepted set of rules provides unity of understanding and unity of approach in the practice of accounting 

and also in better preparation and presentation of the nancial statements. 

Accounting is a language of the business. Financial statements prepared by the accountant communicate 

nancial information to the various stakeholders for decision-making purpose. Therefore, it is important 

that nancial statements prepared by di erent organizations should be prepared on uniform basis. Also 

there should be consistency over a period of time in the preparation of these nancial statements. If every 

accountant starts following his own norms and notions for accounting of di erent items then there will be 

an utter confusion.

To avoid confusion and to achieve uniformity, accounting process is applied within the conceptual
framework of ‘Generally Accepted Accounting Principles’ (GAAPs). The term GAAPs is used to describe rules
developed for the preparation of the nancial statements and are called concepts, conventions, postulates,
principles etc. These GAAPs are the backbone of the accounting information system, without which the
whole system cannot even stand erectly. These principles are the ground rules, which de ne the parameters
and constraints within which accounting reports are generated. Accounting principles are basic norms and
assumptions on which the whole accounting system has been developed and established. Accountant
also adheres to various accounting standards issued by the regulatory authority for the standardization of
accounting policies to be followed under speci c circumstances. These conceptual frameworks, GAAPs and
accounting standards are considered as the theory base of accounting.

Accounting concepts de ne the assumptions on the basis of which nancial statements of a business
entity are prepared. Certain concepts are perceived, assumed and accepted in accounting to provide a
unifying structure and internal logic to accounting process. The word concept means idea or notion, which
has universal application. Financial transactions are interpreted in the light of the concepts, which govern
accounting methods. Concepts are those basic assumptions and conditions, which form the basis upon
which the accountancy has been laid. Unlike physical science, accounting concepts are only result of broad
consensus. These accounting concepts lay the foundation on the basis of which the accounting principles
are formulated.