Let’s say an entrepreneur starts a business. Though he is the owner, the business is treated as a separate entity. It is treated as a distinct feature and therefore it becomes necessary to record the business transactions separately to distinguish from the owner’s personal transactions.
People may come and go, but the business remains forever. Until and unless the business dies by itself.
Business transactions can only be recorded in terms of their monetary value. Depreciation, rent, use of clerical services etc., can be only added up if expressed in terms of money.
The transactions are recorded keeping in mind the actual cost involved and this concept does not consider the projected value or appreciation. Even if a firm knows that a land purchased for Rs. 2,00,000 will fetch double the amount in the near future or worth more than the actual cost, the transaction is recorded only at the actual cost.
Pic Courtesy: Flexiprep
Each transaction has two aspects. When a business acquires an asset, it has to pay money. Acquiring an asset and paying money are two sides of the coin. Similarly, if the asset is acquired through credit, there arises a liability to that extent. Thus if there is an increase in asset, there will be increase in liability also. Assets = Liabilities+Capital or Capital = Assets-Liabilities
Unless money has been realized, no transaction can said to have been taken place.
In order to ascertain the state of the business affairs at regular intervals, usually a period of 52 weeks or 365 days is considered as the accounting period.
Accrual concept is the most fundamental principle of accounting which requires recording revenues when they are earned and not when they are received in cash, and recording expenses when they are incurred and not when they are paid.
It is also known as the historical cost principle. The cost principle requires that assets be recorded at the cash amount (or the equivalent) at the time that an asset is acquired.
The matching concept represents the primary differences between accrual accounting and cash basis accounting. “Matching” means that firms report revenues and the expenses that brought them in the same period.
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