Dual aspect
The concept is the foundation and a basic principle of accounting. The concept assumes that
every transaction has two-fold effects, the debit (receiving) and credit (giving). This means
that every transaction should be recorded twice, once on the debit and once on the credit side
of the affected accounts. The dual aspect concept is the base of the accounting equation and is
the backbone of the double entry system. The completion of double entry of the transaction is
the application of the dual aspect concept.
Matching concept
The concept assumes that the revenue for the accounting period should be matched against
the expenses for the accounting period. Expenses are included in the financial statements,
whether they were paid or not. Revenues are also included in the statement of profit or loss
whether they were received or not.
Accrual concept
The concept states that revenue should be recorded when it is earned and not necessarily when
the payment is received. The concept also assumes that expenses should be recorded when they
are incurred and not when they are paid for. The concept ensures that the firm’s statement of
profit or loss shows all expenses incurred which are associated with the reported revenues for
an accounting period. Accrued expenses are included in the current year’s income statement
because the business incurred the expense in the current period although no payment has yet
been made for the goods or service. Prepayments are excluded in the current year’s income
statement because the amount paid or received is for next or future accounting periods.
Example 2.1: Application of the accrual concept
The business rents premises at a monthly charge of $4 000. During the accounting period, the
business paid $42 000. The business is supposed to pay an annual rental of $48 000 that is $4
000 x 12 months, and this means the business has not yet paid $6 000. According to the accrual
concept, $48 000 should be included in the statement of profit or loss as an expense, although
$6 000 is not yet paid. The outstanding figure of $6 000 is recorded in the statement of financial
position as a current liability as other payables. This is the reason why accrued expenses figure
is added to the trial balance figure in the statement of profit or loss.
Example 2.2: Application of the accrual concept
The business pays insurance premium of $5 000 on a monthly basis. During the year, the
business paid $75 000 for insurance. In this case, the business prepaid $15 000, because the
annual insurance which the business has to pay is $60 000, that is, $5 000 x 12 months. $15
000 prepaid will be used in the next accounting period. According to accrual concept, $60 000
should be recorded in the statement of profit or loss as expenses for insurance while $15 000
prepaid is recorded in the statement of financial position under current assets as other
receivables. So $15 000 should be deducted from $75 000 paid during the year to remain with
an annual insurance figure of $60 000. This is the reason why the prepaid expenses are deducted
from the trial balance figure when preparing statement of profit or loss.
Money measurement
The concept assumes that all transactions of the business are recorded in monetary terms and
using the currency of the country. The concept excludes those transactions or events which
cannot be expressed in terms of money, for example; honesty, loyalty and sincerity of
employees, technological changes, skills of supervisor, reputation of the product and market
conditions cannot be recorded in accounts in spite of their importance to the business. Money
measurement concept also assumes that transactions are not recorded in physical units but in
monetary value. The major advantage of this concept is that, it enables the accountants to have
a guide on what to record and what not to record in books of accounts. The concept also helps
the firms to record assets, liabilities and equity under the same denominator.
Prudence concept
The concept prevents profits and assets from being overstated. Liabilities and expenses should
not be understated. The concept requires depreciation to be charged on non-current assets,
provision on doubtful debts to be made on trade receivables and inventory to be valued at lower
of cost or net realisable value. The concept is also known as concept of conservation. The
deduction of accumulated depreciation from cost in the statement of financial position,
deduction of provision for doubtful debts from trade receivables and the valuation of inventory
at the lower of cost or net realisable value are the application of the prudence concept.
Materiality concept
The materiality concept guides the recognition of a transaction. It means that transactions of
little importance should not be recorded but only those that are material or significant. Thus,
information can be considered as material if its omission or misstatement can have an impact
on the economic decisions to be made by the users. A transaction may be recorded, but
its relevance and significance should be kept in mind. For example, a newly purchased pencil
is an asset of the business. Whenever the pencil is used, a part of the asset is used up. Although
the pencil may still be available at the end of the year, its original cost is so insignificant that it
would be a waste of time to include it in closing inventory. Therefore, it is recorded as an
expense for the period in which it was purchased.
Example 2.3: Materiality concept
Suppose an ash tray is purchased for $100. It may probably last for 5 years. It would be timeconsuming, expensive, and generally inconvenient to treat such an ash tray costing $100 as a
non-current asset and depreciate it over five years using the straight-line method and it would
be easier to classify the entire cost of $100 as an expense for the year in which the ash tray was
bought. The net profit would not be materially misstated for that year or even the remaining
four years. So small payments such as stationery, postage and cleaning expenses should not be
disclosed separately, but should be grouped together as sundry expenses.
Consistency concept
This is the accounting concept which assumes that transactions of a similar nature should be
recorded in the same way in the same accounting period and in future accounting periods. The
concept promotes uniformity which helps the business organisation in comparing its financial
statements with various accounting periods. The use of the same method of depreciation on
similar non-current assets is an example of the application of the consistency concept. Changes
are permitted only when the new method is considered better and can reflect a true and fair
view of the statement of financial position of the firm.