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TRANSCRIPT
ACCOUNTING TUITION
Topic 2: Accounting Concepts
Topic 2: Accounting Concepts What is the Accounting Entity Concept?
Accounting Entity Concept – Each business is a separate entity from its
owner.
What is the Accounting Period Concept?
Accounting Period Concept – The life of a business is divided into specific periods of time for the purpose of preparing financial reports.
What is the Historical Cost Concept?
Historical Cost Concept – All transactions of a business entity are recorded at the original cost to the business.
What is the Prudence (also known as Conservatism) Concept?
Meaning: If an accountant is given two alternatives of reporting an item, the
alternative which gives a lower profit or lower asset value should be adopted.
The following examples indicate the application of conservatism in accounting:
1. Valuation of closing stock at cost price or market price whichever is less
2. Creating provision for bad debts
3. Writing off fictitious assets from the books as early as possible
What is the Consistency Concept?
The same accounting method should be applied in each accounting period
when preparing financial reports. If a certain method of accounting treatment
had been applied to an item, the same method is applied in the future.
What is the Monetary Concept?
This concept means that only transactions which can be measured in money terms are recorded.
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