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Historical Cost Concept

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Accounting Concepts
The preparation of Income Statement and Balance Sheet of a business is based on certain
assumptions. These assumptions are called Accounting Concepts.
Accounting concepts are very helpful in applying commonly established procedures in preparing
financial statements.
Below is a list of basic accounting concepts:
Going Concern Concept
Definition
It is assumed that the business will continue to operate in the foreseeable future (as far as one can
predict). Therefore, there is no intention of closing down.
This concept may not be applied if there are evidences or conditions requiring the ceasing of
business – for example persistent losses or liquidity problem.
Implication
Assets are valued at historical cost less aggregate depreciation and not at disposable value since
there is no intention to dispose of them.
Historical Cost Concept
Definition
Transactions are recorded in terms of the actual amount at which they occurred in the past.
This concept has the advantage of being objective. The amount at which a transaction took place
cannot be disputed over, which is also the amount found on the document issued or received
during the transaction.
This concept, therefore, eliminates subjectivity associated with valuation in accounting records.
Implication
Assets and expenses are recorded at the actual amount spent. Revenues are recorded at actual
amount received/ receivable. Liabilities are recorded at actual amount borrowed, therefore,
payable.
Business Entity also known as Accounting Entity Concept
Definition

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The owner and the business are considered as two different persons, distinct from each other.
Transactions are recorded from the point of view of the business and not the owner. As such, any
amount invested by the owner in the business is considered as a liability by the business.
Also, only those transactions that concern the business are recorded.
Implication
Personal transactions and private property of the owner are not recorded in the books.
Capital and Drawings accounts are kept to record amounts the owner gives to or takes from the
business.
Money Measurement Concept
Definition
Only those transactions that can be expressed in money terms (financial transactions) are
recorded in the books.
Non-financial transactions are therefore not recorded.
Implication
Some strengths or benefits of the business may not be reflected in the books since they cannot be
expressed in money terms – examples are quality of work force and market share.
Accounting Period Concept
Definition
According to this concept, the lifespan of a business is divided into fixed period of time (months,
quarters, half-years or years) for which accounts are prepared.
In most cases an accounting period is a year. Note that the accounting year need not be the same
as the calendar year. For example, the accounting year for business X can be from 1 June to 31
May, for business B from 1 September to 31 August or for business C from 1 April to 31 March.
Implication
Accounts of the business are closed at a specific date every year and final accounts are prepared
(profits/ losses calculated)
Accruals Concept and the Matching Principle
Definition

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Accounting Concepts The preparation of Income Statement and Balance Sheet of a business is based on certain assumptions. These assumptions are called Accounting Concepts. Accounting concepts are very helpful in applying commonly established procedures in preparing financial statements. Below is a list of basic accounting concepts: Going Concern Concept Definition It is assumed that the business will continue to operate in the foreseeable future (as far as one can predict). Therefore, there is no intention of closing down. This concept may not be applied if there are evidences or conditions requiring the ceasing of business - for example persistent losses or liquidity problem. Implication Assets are valued at historical cost less aggregate depreciation and not at disposable value since there is no intention to dispose of them. Historical Cost Concept Definition Transactions are recorded in terms of the actual amount at which they occurred in the past. This concept has the advantage of being objective. The amount at which a transaction took place cannot be disputed over, which is also the amount found on the document issued or received during the transaction. This conc ...
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