HomeLearning CenterWhat is an Accounting Concept? Meaning & Key Principles
Blog Banner

Author

LoansJagat Team

Read Time

6 Min

25 Jul 2025

What is an Accounting Concept? Meaning & Key Principles

blog

Accounting is more than simply numbers; it's about how a company conveys its financial narrative. Every story requires organisation and clarity. Accounting concepts are the standards that ensure the interpretation and comparability of financial statements.

 

Consider Aman, a 24-year-old entrepreneur from Mumbai. In six months, he built his digital marketing agency from ₹2,00,000 to ₹1,20,000 in monthly income. But at year-end, he was perplexed – should he report ₹30,000 unpaid by a client? Should he include his personal laptop worth ₹70,000 for work? What about the ₹15,000 advance rent?

The chartered accountant explained:
 

  • Record the ₹30,000 using the Accrual Concept.
     
  • Exclude the laptop from the Business Entity Concept.
     
  • Treat the ₹15,000 as a pre-paid expense.

 

This is why accounting concepts matter which they bring order and accuracy to your financial story, whether you earn ₹50,000 a month or ₹50 crore a year.

What Are Accounting Concepts?

Accounting concepts are the basic rules and principles that guide how financial transactions should be recorded and reported in business. They ensure that businesses follow a consistent, logical, and accepted method to maintain their books.

These are not legally enforced rules, but universally accepted practices, making it easier to understand, compare, and analyse financial reports across companies, industries, and years.

Why do Accounting Concepts Matter?
 

S.No

Purpose

Description

1

Standardisation

Brings uniformity in how all businesses maintain accounts

2

Comparability

Allows comparison across businesses and time

3

Transparency

Ensures the true financial picture is presented

4

Avoids Misinterpretation

Removes confusion or manipulation

5

Legal & Tax Compliance

Aligns with expectations of auditors, banks, and tax authorities

1. Business Entity Concept

This concept says: A business and its owner are separate entities. Their finances should be treated individually.

Aman used his credit card to buy a company laptop. Earlier, he would’ve skipped recording it. But this concept made him realise that the business owes money to him. That’s not a personal expense, it’s a loan to the business from the owner.

 Example:
 

  • Aman invests ₹1,00,000 into the business
     
  • Later withdraws ₹20,000 for personal use
     
  • That ₹20,000 is recorded as Drawings, not a business expense

Business Entity Concept
 

Situation

Business Action

Reason

Owner invests money

Record as capital

Business received funds

Owner withdraws money

Record as drawings

Not a business expense

The owner pays rent personally

Reimburse or record as a liability

Business incurred cost

Personal expenses with company funds

Reduce owner’s capital

Not related to business

Shared resources (e.g. laptop)

Allocate value proportionately

Keep clarity

2. Going Concern Concept

This concept assumes the business will continue to operate for the foreseeable future. That’s why assets are not liquidated or sold off immediately. They are recorded at cost and depreciated over time.

Aman thought of writing off the cost of his office furniture in the same year he bought it. His CA told him, “Tu business bandh kar raha hai kya? Nahi right? Then it’s a long-term asset.”

Example:
 

  • Furniture bought: ₹60,000
     
  • Useful life: 6 years
     
  • Depreciation/year: ₹10,000

So, every year, only ₹10,000 is charged to P&L, and the rest stays on the balance sheet as an asset.
 

Asset Purchased

Value (₹)

Useful Life

Annual Depreciation

Why Spread Cost?

Office Furniture

60,000

6 years

10,000

The business will run for years

Laptop

50,000

5 years

10,000

The asset has been used for over 5 years

AC Unit

36,000

6 years

6,000

Avoid inflating expenses in one year

Branding Cost

1,20,000

10 years

12,000

The benefit spreads over the long term

Website Development

80,000

5 years

16,000

Business asset, not short-term spend

3. Money Measurement Concept

Only those transactions which can be measured in money are recorded in the books.

Aman had 100k+ Instagram followers and great customer feedback, but none of that went into the balance sheet. Why? Because you can’t assign a reliable rupee value to goodwill or brand unless you buy it.

 Example:
 

  • Salary paid: ₹25,000 → Recorded
     
  • Customer review: "Excellent service" → Not recorded
     
  • Furniture cost: ₹40,000 → Recorded
     
  • Team motivation? → Not recorded
     

Event

Can Be Recorded?

Reason

Purchase of inventory worth ₹30,000

Yes

Monetary transaction

Customer feedback

No

Non-quantifiable

Paying a salary to the employee

Yes

Measurable payment

High employee morale

No

Not in money terms

Buying brand rights worth ₹5 lakh

Yes

Paid for, monetary value exists

4. Cost Concept

Assets and items are recorded at their original purchase cost, not market value.

Aman bought a DSLR for ₹70,000 for his media work. One year later, its market value was ₹50,000. Still, in accounting books, it remains at ₹70,000 - depreciation.

 Example:
 

  • DSLR purchase: ₹70,000
     
  • After 1 year depreciation: ₹14,000
     
  • Book value = ₹56,000
     
  • Market value = ₹50,000 → Not considered in books
     

Asset

Purchase Price

Current Market Value

Depreciation

Book Value

DSLR Camera

₹70,000

₹50,000

₹14,000

₹56,000

Office Chair

₹12,000

₹9,000

₹2,000

₹10,000

Computer

₹65,000

₹55,000

₹13,000

₹52,000

Software License

₹90,000

₹80,000

₹18,000

₹72,000

Furniture

₹40,000

₹30,000

₹8,000

₹32,000

5. Accrual Concept

According to this concept, income and expenses must be recorded in the period they relate to, not when cash is received or paid.

Aman did a project in March and received payment in April. Should he record income in April? No, under accrual, it’s recorded in March, when the service was delivered.

 Example:
 

  • Project completed: 28 March
     
  • Payment received: 10 April
     
  • Income recorded in: March

Similarly:

  • Rent due for March but paid in April → Expense of March
     

Transaction

Amount (₹)

Service Month

Cash Movement

Recorded In

Client Website Delivered

35,000

March

April 5

March

Rent for Office

20,000

March

April 1

March

Electricity Bill

3,000

March

March 31

March

Software Subscription Renewed

12,000

April

March 28

April

Ad Campaign Executed

15,000

March

March 30

March

Recap All Accounting Concepts at a Glance
 

Concept Name

What It Means

Business Entity

Owner ≠ Business

Going Concern

The business will continue in future

Money Measurement

Record only measurable transactions

Cost

Record at original cost, not market value

Accrual

Record income/expense in the relevant period

Conclusion 

Before Aman knew about these concepts, his accounts were a mix of personal and business payments, with missing invoices and confusing asset values. However, after learning the accounting concepts, his financial records became crystal clear. He stopped treating accounting as a boring task and started seeing it as the real storytelling of his business’s growth.

Accounting concepts aren't just rules for CAs or MBAs. They are for every entrepreneur, freelancer, startup founder, and even college student who wants to understand finance.

If you understand these five core concepts, you’ll not only record better but also think better about your business. Let your books tell a story you’re proud of.

FAQs on Accounting Concepts

What are accounting concepts in simple words?

Accounting concepts are the basic rules and assumptions that guide how businesses record and report their financial transactions. They make sure everyone follows the same principles so that accounts are clear, comparable, and trustworthy.

Why are accounting concepts important?

Without accounting concepts, every business might record transactions differently, creating confusion. These concepts bring standardisation, accuracy, and transparency, which are crucial for audits, tax filings, decision-making, and maintaining investor confidence.

Are accounting concepts legally mandatory?

No, they are not written into law but are universally accepted practices. Auditors, tax authorities, and investors expect businesses to follow these concepts because they reflect fairness and consistency in financial statements.

 

Apply for Loans Fast and Hassle-Free

About the Author

logo

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?

coin

Quick Apply Loan

tick
100% Digital Process
tick
Loan Upto 50 Lacs
tick
Best Deal Guaranteed

Subscribe Now