Accounting concepts and conventions

There are seven concepts:

The business entity concept:

This concept states that all accounts are kept in respect of business entities. Every effort must be made to distinguish the business from the person or people who own or manage these businesses. You will see that in the case of a sole trader, the accounting books are kept in a manner which distinguishes the business from the owner. In the case of a partnership, the accounting reflects a distinction between the partnership and the individual partners. For companies and cooperatives, the businesses are kept separate from their shareholders or owners. This distinction is reflected in the names given to the various forms of businesses as well as the practice of opening separate business bank accounts.

Money as a common denominator:

A business has many varied assets, liabilities and other items of value. the values placed on these items cannot be added or subtracted unless there is a common base. In accounting, money is used as this common base or denominator to express certain facts about the business, including the value of its assets, the amount of liability, its working capital and the general wealth of the business. This concept is also known as the money measurement concept.

The cost concept:

Assets acquired by businesses are recorded in the accounting books to reflect the price paid for them. That is, the assets are recorded ‘at cost’. This means then, that very often the costs recorded in the accounting books do not represent the current values of the assets. You will note in Section 2, for example, that the assets shown on a balance sheet are shown at cost.

The going concern concept:

Generally, the accounting for a business entity assumes that the business will continue its operation for years to come. When this is not the case different approaches will be adopted. You are required to treat the business as a going concern when preparing the accounts.

The dual aspect concept:

This is a central concept in accounting. Each business transaction is described as having a ‘dual aspect’. This means that each business event or transaction affects a minimum of two accounts. Each transaction results in both a giving and a receiving of some value.

Forms of business organization:

Sole Trader:

This is a business that’s wholly owned by one person. There are many kinds of sole trader or sole proprietor businesses, example: Grocery shops, bakeries, salons, pharmacies ect..

Partnership:

Formed by two or more people but not exceeding 20. They’re often formed by professionals such as lawyers, accountants, doctors, as well as many others.