4 Main Concepts of Accounting Theory

The following points highlight the four main concepts of accounting theory. The concepts are: 1. The Concept of Transaction 2. Accounting Period Concept 3. Realisation Concept 4. Concept of Full Disclosure.

1. The Concept of Transaction:

The major concept in accounting theory that appears in the same logical sequence is the concept of transaction. In its simplest form, transaction can be defined as exchange of assets between entities or it is an exchange of one asset for another of the same entity.

The definition of transactions as exchange of assets over a specified period, however raises three other basic questions. Firstly, it is necessary to be certain whether the definition can be restricted to exchange of assets only between entities.

Secondly, it is important to be clear whether such preferred asset positions arrived at through various transactions can be sustained in terms of the so-called ordinal preferences claimed by the economist as being adequate, particularly in view of the fact that the surplus assets have to be distributed in physical terms in one sense of the other, at the last instance.

Finally, since all transactions involve implicit valuations in terms of current unit of account changes in the conventions regarding valuation involve introducing multiple standards and therefore violate both the principles of materiality and consistency.

2. Accounting Period Concept:

According to this concept, the life of the business is divided into appropriate segments for studying the results shown by the business after each segment. It is obvious that in principle any period ranging from a day to several years can be chosen and fairly strong cases can be made for each. By usage however, a year is generally and widely accepted.

It may be observed that continuity of business is directly responsible for the introduction of periodical accounting and the introduction of the time element, which makes accrual accounting unavoidable. It is a fact that the accrual accounting leads to the problems of valuation and estimates but the likelihood of subjective divergence of the results of income accounting may not necessarily follow.

If the periods chosen are not very short and cover all seasonal fluctuations and there remains on average a uniform flow of products at all stages of productions within every period, results are not likely to vary much. In accounting time, interval is called accounting period.

3. Realisation Concept:

Realisation is a concept not a principle. It can be seen that it is clearly related to the questions raised in connection with the concept of transaction. Inconsequence, it is affected considerably by formal legal consideration as by the social realities about the completion of transactions. It is often found that certain so called simple things are immensely complicated, and inspite of formal legislative efforts to keep them simple.

Fulfillment of contract is one of these. It is difficult to place the realisation concept in its exact position. Some accountants seem to take the view that realisation involves dealings across the counter, or dealings between the representatives of two entities at the hand shaking distance.

Under certain circumstances, the realisation concept must be fictitious in principle, carried on in accounting as a hangover when breaches of contract or dishonour of cheques were not unfamiliar. There are certain exceptions to this concept also.

4. Concept of Full Disclosure:

Running through the entire stream of concepts, are the ideas relating to fair presentation or full disclosure. The concept of full disclosure cannot in principle stand for what it purports to do. An effort to attain the objective would clutter up the process with such voluminous and heterogeneous details that in effect nothing could be revealed.

In fine, full disclosure involves effective summarisation, classification, aggregation as well as explanations with the object of presenting a true and fair view of the activities of an enterprise.

Subject to the constraints of generally accepted accounting principles, the principle of full disclosure links up step by step with actuality, objectivity, materiality and consistency to attain a true and a fair view of the enterprise activities. It is a complex procedure.