Partial preview of the text
Download Basic of Financial Accounting and more Study notes Financial Accounting in PDF only on Docsity!
ACCOUNTING CONCEPTS Entity Concept . It is aed important to note that for accounting purposes the business is treated as a unit or entity apart trom its owners, creditors and others. In other words, the proprietor of an enterprise is always considered to be separate and distinct from the business which he controls. All the transactions of the business are recorded in the books of the business (though they belong to the proprietor) from the point of view of the business as an entity and even the proprietor is treated as a creditor to the extent of his capital. Capital is thus a liability like any other liability although the amount is owing only to the proprietor. In the case of sole trading and partnership concerns the proprietors may even draw the amounts out, thus reducing the liability of the business. But in the case of corporate bodies, shareholders stand on a different footing. They cannot reclaim the amount they have invested. The can sell the shares to others if they desire to unload their investment. Therefore, in the case of corporate bodies capital is paid out only at the time of winding up, provided surplus assets are available after paying off the creditors. In the case of companies the entity concept is more apparent, as in the eyes of law it has separate legal entity independent of the persons who contribute its capital. The concept of accounting entity for every business determines the scope of what is to be recorded or what is to be excluded from the business books. Therefore, whenever business receives cash from the proprietors cash account is debited as business receives cash and capital account is credited, capital account representing the personal account of the proprietor. In the case of corporate bodies since there are too many contributors the amount is shown under a single account called share capital account. In the case of non-corporate bodies there is no separate legal entity. Still the principle of business entity is observed for accounting purposes. For example, although for legal and most practical purposes, we regard the sole trader and his business as one and the same thing, we nevertheless, for accounting purposes, regard them as different entities. Therefore in business, only the business assets and liabilities are recorded although legally there is no distinction between his business assets and liabilities and his private assets and liabilities. Thus, the concepts of legal and business entities are not compatible with each other. This is also clear from the fact that in the case of big companies each department may be the base for accounting although legal entity is much larger and covers all the departments. Likewise, in the case of consolidated statements accounting entity is much larger than the legal entity. Going Concern Concept This concept assumes the enterprise will continue to exist in the foreseeable future: This is in contrast with another view that the enterprise will be liquidated. According to A.S. -1 relat- ing to disclosure of accounting policies, going concern concept is a fundamental accounting assumption underlying the preparation of financial statements. Under this assumption, “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 its operations”. This assumption implies the following : (i) Assets will be valued on the basis of going concern assumption. In other words, accountants do not record the values of goods and assets which will be fetched if FIANANCIAL ACCOUNTING 
