Explain any two basic concepts of accounting.

(i) Business Entity Concept — According to this concept, a business is treated as a unit separate and distinct from its owner. A completely separate set of books is kept for the firm and transactions are recorded from the firm's point of view. The capital provided by the owner is treated as a liability of the firm; interest on capital is treated as an expense of the business; and money or goods withdrawn by the proprietor for personal use are treated as drawings. This concept is necessary to ascertain the true net profit and the true financial position of the firm. It applies equally to sole proprietorships, partnerships and companies.

(ii) Money Measurement Concept — According to this concept, only those transactions which can be expressed in terms of money are recorded in the books of accounts. An event, howsoever important, will not be recorded if its monetary effect cannot be measured with reasonable accuracy. For example, the retirement of the chairman cannot be recorded. Money serves as a common denominator that allows diverse items (machinery, land, raw materials, etc.) to be added together, making accounting records homogeneous, relevant, simple and understandable.