Going concern concept

• Normally the business is started with the intention of continuing it indefinitely or at least for the foreseeable future.
• The investors lend money and the creditors supply goods and services with the expectation that the enterprise would continue for long.
• Unless there is a strong evidence to the contrary, the enterprise is normally viewed as a going (continuing) concern.
• Hence, financial statements are prepared As a going concern basis and not on liquidation (closure) basis.
• Certain expenses like rent, repairs, etc., give benefit for a short period, say less than one year.
• But the benefit of some other expenditure like purchase of a building, machinery etc., is spread over a longer period. If the benefit of an expenditure is limited to one accounting year it is fully charged to the Profit and Loss Account of that year.
• But, if the benefit of an expenditure is available for a number of accounting years, it must be spread over a number of years.
• Hence, only a portion of such expenditure is charged to the Profit and Loss Account every year.
• The balance is shown in the Balance Sheet as an asset.
• Let us take an example, Suppose a firm purchased a delivery van for Rs. 60,000 and its expected life is 10 years. It means the business will use the van for a period of 10 years.
• So, the accountant has to spread the cost of the van over 10 years.
• He would charge Rs. 6,000 (1110 of its cost) every year to the Profit and Loss Account in the form of depreciation, and show the balance in the Balance Sheet as an asset.
• This is based on the assumption that the business will continue for an indefinite period and the asset will be used for its expected life. Thus this concept is regarded as the basic assumption in accounting according to which the fixed assets are valued at historical cost less depreciation and not at its realizable value.

Conservatism Concept

• This is also known as Prudence Concept.
• This concept tries to ensure that all uncertainties and risks inherent in business are adequately provided for, accountants generally prefer understatement of assets or revenues, and overstatement of liabilities or costs.
• This is in accordance with the traditional view which states anticipate no profits but anticipate all losses. In other words, you should account for profits only when they are actually realized.
• But in case of losses, you should take into account even those losses which may be a remote possibility.
• That is why the closing stock is valued at cost price or market price whichever is lower.
• Provision for doubtful debts and provision for discounts on debtors are also made according to this concept.
• This reflects a generally pessimistic attitude of the accountants but it is regarded as the best way of dealing with uncertainty and protecting creditors against an unwarranted distribution of the firm's assets as dividends.

Consistency Concept

• The principle of consistency means of information from period to period with unchanging policies and procedures.
• It means that accounting method adopted should not be changed from year to year.
• For example, the principle of valuing closing stock at cost price or market price whichever is lower should be followed year after year.
• Similarly, if depreciation on fixed assets is provided on straight line basis, it should be followed consistently year after year.
• Consistency eliminates personal bias and helps in achieving comparable results.
• If this principle of consistency is not followed, the accounting information about arm enterprise cannot be usefully compared with similar information about other enterprises and so also within the same enterprise for some other period.
• Consistent use of the same methods and bases from one period to another, enhances the utility of the financial statements.
• However, consistency does not prohibit change.
• Desirable changes are always welcome. But such changes should be completely disclosed while presenting the financial statements.

Full Disclosure Concept

• You know the financial statements are the basic means of communicating financial information to all interested parties.
• These statements are the only source for assessing the performance of the enterprise for investors, lenders, suppliers, and others.
• Therefore, financial statements and their accompanying footnotes should completely disclose all relevant information of a material nature which relate to the profit and loss and the financial position of the business.
• This enables the users of the financial statements to make correct assessment about the profitability and financial soundness of the enterprise.
• It is therefore necessary that the disclosure should be full, fair and adequate.

Materiality Concept 

• Materiality primarily relates to the relevance and reliability of information.
• An item is considered material if there is a reasonable expectation that the knowledge of it would influence the decision of the users of the financial statements.
• All such material information should be disclosed through the financial statements and the accompanying notes. For example, commission paid to sole selling agents, if any, should be disclosed separately in the Profit and Loss Account.
• Similarly, if there is a change in the method or rate of depreciation, this fact must be duly reported in the financial statements.
• A strict adherence to accounting principles is not required for items of little significance or of non-material nature. For example, erasers, pencils, scales, etc., are used for a long period, but they are not treated as assets. They are treated as expenses.
• This does not affect the amount of profit or loss materially.
• Similarly, while showing the amounts of various items in the financial statements, they can be approximated. Up to paise.
• Even if they are shown to the nearest rupee or hundreds, there may not be any material effect. For example, if an amount of Rs, 1,45,923.28 is shown as Rs. 1,45,923 or Rs. 1,45,900 it does not make much difference for assessment of the performance of the enterprise.