Entity
Concept
In accounting, the entity of business is considered separate
from the existence of its owners. Accounts are kept for the
entity as distinct from owners. Thus, money invested by the
proprietor by way of capital is considered to be the liability
of the business to the proprietor. If proprietor withdraws some
cash or goods, they are treated as drawings but not as business
expense. Capital is reduced by the amount of drawings. The principle
of separate entity is quite visible in the case of corporate
bodies since a company is a legal entity separate from the shareholders
who own it. In case of a corporate body the liability of the
shareholders is limited to the extent of the value of shares
held by them. But in case of non-corporate bodies the owners
or partners remain legally liable for the debts of the business
even after its closure. Their private property can be sold to
discharge the liability of the firm.
Money Measurement Concept
In accounting, a record is made only of those
facts or transactions that can be expressed in monetary terms.
It provides a common yardstick, i.e., money for measuring,
recording and summarizing the transaction. Events, which cannot
be expressed in money terms, do not find a place in account
books. For example, salary paid to manager is recorded in account
books but his competence, which cannot be expressed in monetary
terms, is not recorded in the books. The application of money
measurement concept makes accounting data and information relevant,
simple, understandable, homogeneous and comparable. The main
advantage of money measurement concept is that even a layman
is able to understand and appreciate the things stated in terms
of money. However, the concept suffers from the following flaws:
- Money does not have a constant value. The value of money
changes because of inflation or deflation in the country.
- All business assets cannot be measured in money terms.
It is very difficult to calculate the value of goodwill
or measure the competency or morale of employees.
Going
Concern Concept
This concept assumes that the business will exist for certain
foreseeable future with the specified goal or for specified
duration. Thus recording and valuation of long-term assets
and liabilities are based on this assumption. Fixed assets
are recorded on historical costs and written down over the
expected life of the assets. Similarly long-term liabilities, i.e., debentures, preference shares, long-term loans
are raised and their terms of repayment are settled on this
assumption. The going concern concept is the backbone of accounting
and is based on the following assumptions:
- Business has an indefinite life.
- Assets are depreciated on the basis of their expected
life without caring for their current values.
- In case of innovations or new inventions, their effect
is measured in financial terms and assets are depreciated
to allow for such innovations or inventions.
However, if it is certain that a particular venture will
exist only for a limited period, the accounting records will
be kept accordingly. Further, if in the long run a business
decides to revalue the assets and transfer the surplus or
deficit to capital reserve, it will not be taken as violation
of the going concern concept. Here revaluation is on a permanent
basis to reflect current values of assets.
Accounting Standard (AS)-l states "the enterprise is normally
viewed as a going concern, that is, as continuing in operation
for the foreseeable future. It is assumed that the enterprise
has neither the intention nor the necessity of liquidation
or of curtailing materially the scale of operations." Continuity
of activity is to be true of all types of business enterprises.
The assumption does not imply the permanent existence of an
enterprise. It simply assumes stability and continuity for
a period of time long enough to carry out present plans, contracts
and commitments. |
Accounts
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