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Applying the Accounting Concepts. Business Entity. Duality Though the fundamental accounting concepts are straightforward in their purpose, they can be applied in many – and sometimes conflicting – ways. For example, prudence suggests deferring revenue until it is reasonably certain, yet the accruals or matching concept suggests that accounts should reflect the activity of the business, not just the transactions. Therefore there are a lot of other conventions which provide accountants with some guidelines. Business entity or separate entity This convention asserts that for accounting purposes the business and its owner(s) are separate. This convention is necessary, otherwise it would be impossible to focus on the performance and position of the particular business. Without the separation of owner and business, matters, which relate to the owner but not to the business, could easily distort the picture shown by the business accounts. Duality To keep a complete record of any business transaction it is important to know both where money came from and what has been done with it. Thus dual effect convention holds that every transaction has two effects which are equal in value and opposite in their effect on the balance sheet. Accounting is based on the balance sheet equation (Assets = Equity + Liabilities), and this relationship has to be maintained. That is the basis of double-entry bookkeeping. You can think of it as the accounting equivalent of Newton’s third law: “For every force there is an equal and opposite reaction”. Read the text. Decide whether these statements are TRUE, FALSE or NOT STATED Match up these accounting principles with the descriptions below Choose the translation that is suitable in the accounting texts:
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