Accounting Postulates are basic assumptions that form the foundation of accounting principles and practices. They provide a base for preparing and maintaining accounting records in a consistent and systematic manner. These assumptions guide accountants in recording, measuring and reporting financial transactions of a business. Accounting postulates help in maintaining uniformity and reliability in financial statements. They explain how accounting information should be recognized and presented. Common postulates include the business entity concept, going concern concept, money measurement concept and accounting period concept. These concepts help accountants understand and record business activities properly and ensure that financial information is useful for decision making.
Accounting Postulates:
1. Business Entity Concept
The business entity concept states that a business and its owner are treated as two separate entities for accounting purposes. All financial transactions of the business are recorded separately from the personal transactions of the owner. This concept helps in maintaining clear and accurate records of business activities. For example, if the owner invests money in the business, it is recorded as capital and not as business income. Similarly, if the owner withdraws money for personal use, it is recorded as drawings. By separating personal and business transactions, this concept helps in determining the correct financial position and performance of the business.
2. Going Concern Concept
The going concern concept assumes that a business will continue its operations for a long period of time and will not close in the near future. Because of this assumption, assets are recorded at their original cost rather than their market value. Businesses also plan their activities and investments with the expectation that operations will continue in the future. If a business were expected to close soon, accounting methods would be different. This concept helps in preparing financial statements based on normal business operations and long term planning. It also allows companies to spread expenses like depreciation over several accounting periods.
3. Money Measurement Concept
The money measurement concept states that only those transactions and events that can be measured in monetary terms are recorded in accounting. Business activities that cannot be expressed in money are not included in accounting records. For example, the skill of employees or the reputation of a business cannot be easily measured in money, so they are not recorded in financial statements. This concept helps in maintaining uniformity and clarity in accounting records. By recording transactions in terms of money, accounting can present financial information in a simple and understandable form for users.
4. Accounting Period Concept
The accounting period concept states that the life of a business is divided into specific time periods for the purpose of preparing financial statements. Although a business may continue for many years, its financial performance is measured for shorter periods such as a month, quarter or year. These periods are known as accounting periods. At the end of each period, financial statements like the income statement and balance sheet are prepared. This helps owners, managers and investors evaluate the financial performance of the business regularly and make timely decisions.
5. Cost Concept
The cost concept states that assets should be recorded in the accounting books at the price paid to acquire them. This price is known as the historical cost. According to this concept, assets are not recorded at their current market value. Recording assets at their original cost helps maintain objectivity and reliability in accounting records. For example, if a machine is purchased for a certain amount, it will be recorded at that cost even if its market value changes later. This concept ensures that financial statements are based on actual and verifiable transactions.
6. Dual Aspect Concept
The dual aspect concept states that every business transaction has two aspects and affects at least two accounts. One account receives value and another account gives value. This concept forms the basis of the double entry system of accounting. For example, when a business purchases goods with cash, the goods account increases while the cash account decreases. Both aspects of the transaction must be recorded to keep the accounting equation balanced. This concept ensures accuracy in recording financial transactions and helps maintain proper financial records.
7. Realization Concept
The realization concept states that revenue should be recorded when it is earned and realized, not necessarily when cash is received. Revenue is considered realized when goods are sold or services are provided to customers. This concept ensures that income is recorded at the proper time in the accounting period. For example, if goods are sold on credit, the revenue is recorded at the time of sale even if payment is received later. This helps in presenting a correct view of business income during a particular accounting period.
8. Matching Concept
The matching concept states that expenses should be recorded in the same accounting period as the revenue they help generate. This concept helps in determining the correct profit or loss of a business for a particular period. For example, if a business earns revenue from selling goods, the cost of producing or purchasing those goods should be recorded in the same period. By matching revenues with related expenses, accounting provides a more accurate picture of financial performance and helps in proper profit calculation.
