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Unit 2: Principles of Accounting

in money. Those transactions/activities of the business which cannot be measured in Notes
money are not recorded in accounting.
4. Accounting Period Assumption: As per the going concern concept, the income of the
business can be measured at the time of the liquidation of the business or at the time when
business is sold. But practically it is very difficult to wait such a long period that is also not
definite. Therefore, it is agreed among the accountants that the economic life of the business
is divided into different segment for the purpose of preparing of the financial statements
and the determination of profits. Generally this segment of time is one year either calendar
year or a financial year. Sometime it may be less than twelve months i.e., quarterly, half
yearly, etc. Reports made for less than twelve months are called interim reports and are
less reliable than annual reports. At the end of each segment (period) profit and loss
account and balance sheet are prepared.

2.2.2 Basic Accounting Principles (Concepts)

These basic accounting principles are commonly accepted/agreed principles by the accountants
to record the business financial transactions. These are as follows:

Money Measurement Concept
This is the concept tunes the system of accounting as fruitful in recording the transactions and
events of the enterprise only in terms of money. The money is used as well as expressed as a
denominator of the business events and transactions. The transactions which are not in the
expression of monetary terms cannot be registered in the book of accounts as transactions.

Example:
1. 5 machines, 1 ton of raw material, 6 forklift trucks, 10 Lorries and so on. The early
mentioned items are not expressed in terms of money instead they are illustrated
only in numbers. The worth of the items is getting differed from one to the other. To
record the above enlisted items in the book of accounts, all the assets should be
converted into money.
2. 5 lathe machines worth 1,00,000; 1 ton of raw materials worth amounted 15,00,000
and so on.

!
Caution
 The transactions which are not in financial in character cannot be entered in the
book of accounts.
 Recording of transactions are only in terms of money in the process of accounting

Business Entity Concept

This concept treats the owner as totally a different entity from the business. To put in to nutshell
“Owner is different and Business is different”. The capital which is brought inside the firm by
the owner, at the commencement of the firm is known as capital. The amount of the capital,
which was initially invested, should be returned to the owner considered as due to the owner;
who was nothing but the contributory of the capital.

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