CHAPTER II

CONCEPTS

a. The business entity

The business undertaking is generally conceived of as an entity or institution in its own right,
separate and distinct from the parties who furnish the funds, and it has become almost axiqmatic
that the business accounts and statements are those of the entity rather than those of the
proprietor, partners, investors, or other parties or groups concerned.
That the concept of the entity is important for unincorporated as well as incorporated business
should be emphasized. From the standpoint of administration it is essential that business affairs
be segregated from private or personal affairs.
With the entity concept as a basis, there is no difficulty in accepting the proposition that all costs
legitimately incurred by the enterprise are properly included, in the first instance, in the total of
assets.
b. Continuity of activity
The assumption that the business entity has continuity of life may be largely one of convenience,
since no one can confidently predict thecourse of events.
The continuity concept has an important bearing on periodic reports. In so far as the business
enterprise is a continuous stream of activities, with those of the moment conditioned by those of
the past and in turn conditioning those of the future, the process of breaking the stream into fiscal
segments, for each of which reports are prepared, severs many real connections and tends to give
a specious color of immediate reliability to data which in substantial measure depend on the
course of future events.
The concept of continuity is also important in that it complements and strengthens the concept
of earning power. Earning power is the significant basis of enterprise value.
It is the task of accounting to make the most truthful and significant measurements possible of
the continuous flow of business activity (allocation of costs and revenues as between the present
and future)
c. Measured consideration
The term “measured consideration” is more appropriate than the word “value” to indicate the
type of information which makes up the subject matter of accounting.
 “Price-aggregate” is used here rather than “cost” because the latter term is hardly broad enough
to designate the basic subject matter of accounting.
Accounting uses money-price only because it is a convenient common denominator by which
diverse objects and services are expressed homogeneously and because it is the common mode
of expressing bargained exchanges.
d. Costs attach
Costs can be marshaled into new groups that possess real significance. It is as if costts had a power
of cohesion when properly brought into contact. Costs are not marshaled to show value or worth.
In their new position they are still costs, that is, price-aggregates of exchange transactions, they
have merely been regrouped. In order to learn what costs have already met the test (recapture)
and what costs still await the test, accounting assumes that acquisition costs are mobile and may
be apportioned or regrouped, and that costs reassembled have a natural affinity for each other
which identifies them with the group.
e. Effort and accomplishment
Costs are considered as measuring effort, revenues as measuring accomplishment. Costs are
traced carefully from the first acquisition of goods or services through various regroupings for the
specific object of having available, at the time of sale of the product, information regarding
relevant costs-that is, those costs related to a specific segment of revenue because they are
technically or economically associated with a corresponding segment of product, or unit of time
in which such product appears. Ideally, all costs incurred should be viewed as ultimately clinging
to definite items or goods sold or service rendered. If this conception could be effectively realized
in practice, the net accomplishment of the enterprise could be measured in terms of units of
output rather than of intervals of time. The concept of matching cost and revenue is the
proposition that no part of income, the excess of accomplishment over effort, may be viewed as
cost. Accounting exists primarily as a means of computing a residuum, a balance, the difference
between costs (as efforts) and revenue (as accomplishments) for individual enterprises. This
difference reflects managerial effectiveness and is of particular significance to those who furnish
the capital and take the ultimate responsibility.
Accounting does not match disbursements and receipts, but efforts and accomplishments, service
acquired and service rendered, acquisition price-aggregates and disposition price-aggregates.
f. Verifiable, objective evidence
 Recorded revenue was accepted as valid only on the basis of the objective evidence furnished by
bona fide sales to independent parties, recorded expenditures were accepted as valid only on the
basis of the objective evidence furnished by authentic business documents related to the
transaction.
“to verify” means to establish the truth, to test the accuracy of a fact, to substantiate an assertion.
“evidence” is a means of ascertaining the truth or of furnishing proof.
The basic concept of verifiable, objective evidence may seem in the present period –the short-run
–that hesitation, that some debtors are not drifting toward insolvency because no notice has
come from a bankruptcy court.
A scientific point of view is one that places reliance upon objectively determined facts, which
should also be long-run facts and not merely end results.
Objective facts need not be conclusively objective to be dependable, if they are convincingly
objective, they are convincingly dependable.
The basic concept of verifiable, objective evidence, then contains an element of variability.
g. Assumptions
In accounting the business fabric is conceived in terms of specific enterprises and these units are
construed as focal points of recording and reporting. The concept of continuity of operation is
justified on the basis of typical experience. No doubt the contracting parties do not invariably act
in complete harmony with existing market conditions. The parties may not be equally informed,
or equally desirous of trading, at times transactions are entered into unwisely or carelessly. If the
parties are not entirely independent, non-commercial considerations may exert a potent
influence. And yet the reasonableness of the assumption, for the typical case, is evident. The
assumption that recorded dollar cost continues to represent actual cost permeates accounting
thought and practice, as it does the law. Accounting, in other words, assumes a stable measuring
unit.