SS1 First Term Financial Accounting Lesson Note – Accounting Concepts and Conventions

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WEEK FIVE (5)      

TOPIC: ACCOUNTING CONCEPTS AND CONVENTIONS

CONTENTS:

(a) Extraction of Accounting Concept

1. Entity concept
2. Going concern Concept
3. Conservatism and prudency concept
4. Historical cost concept
5. Money measurement
6. Materiality
7. Realization

SUB-TOPIC:  ACCOUNTING CONCEPT

Accounting concepts which is also referred to as principles and fundamental accounting postulate, are rules adopted as guides to actions in preparation of accounting statements.

• Entity Concept: This concept draws a distinction between the business and the owner. This concept states that the business is a personality of its own, which can sue and be sued in its own name and not in the name of the owner.
• Going Concern: This is an assumption that an organization will exist forever (at least in the force able future) except otherwise proved. This concept is the authority behind the recording of assets in the books where values of properties are extended into the future especially as concerning their benefits.
• Money concept: This states that all financial transactions must be expressed with the currency in use in that location. The currency used in recording the financial data can be translated into other currency using the convertible nature of money.

This concept believes strongly that only financially oriented transaction should be given effect.

• Historical cost concept: This states that the cost values of financial transaction should be used in recording such a transaction instead of fair current market values e.g. where Olu purchased a “Honda Car” latest series for N2million in Lagos while his friend Musa bought the same brand of Honda Car at the sum of N1.5million in Togo. It is expected that Olu should record his vehicle based on N2million and not otherwise while Musa do as N1.5 million and not otherwise.

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