Accounting Concept Final
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Transcript of Accounting Concept Final
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CCOUNTING
CONCEPTS ND
PRINCIPLES
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INTRODUCTION
In order to make the accounting language
convey the same meaning to all people & to
make it more meaningful, most of the
accountants have agreed on a number ofconcepts which are usually followed for
preparing the financial statements.
These concepts provide a foundation for
accounting process. No enterprise canprepare its financial statements without
considering these concepts.
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ACCOUNTING CONCEPTS
Business entityconcept
Money
Measurement/stablemonetary unit concept
Going Concernconcept
Historical Cost concept Prudence/conservatis
m concept
Materiality concept
Accounting period
Dual aspect concept
Revenue recognitionconcept
Matching conceptAccrual concept
Objectivity concept
Timeliness
Consistency concept
Full disclosure concept
Uniformity concept
Relevance concept 3
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BUSINESS ENTITY CONCEPT
Meaning
The business and its owner(s) are two separate
existence entity
Any private and personal incomes and expensesof the owner(s) should not be treated as the
incomes and expenses of the business
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Examples
Insurance premiums for the owners houseshould be excluded from the expense ofthe business
The owners property should not beincluded in the premises account of thebusiness
Any payments for the owners personalexpenses by the business will be treatedas drawings and reduced the ownerscapital contribution in the business
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MONEY MEASUREMENT / STABLE MONETARY
UNIT CONCEPT
Meaning
All transactions of the business arerecorded in terms of money
It provides a common unit of measurement
Examples
Market conditions, technological changes
and the efficiency of management wouldnot be disclosed in the accounts
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GOING CONCERN CONCEPT
Meaning
The business will continue in operationalexistence for the foreseeable future
Financial statements should be prepared on agoing concern basis unless management eitherintends to liquidate the enterprise or to ceasetrading, or has no realistic alternative but to do
so
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Example
Possible losses form the closure ofbusiness will not be anticipated in theaccounts
Prepayments, depreciation provisions maybe carried forward in the expectation ofproper matching against the revenues offuture periods
Fixed assets are recorded at historicalcost
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HISTORICAL COST CONCEPT
Meaning
Assets should be shown on the balancesheet at the cost of purchase instead of
current value Example
The cost of fixed assets is recorded at thedate of acquisition cost. The acquisition
cost includes all expenditure made toprepare the asset for its intended use. Itincluded the invoice price of the assets,freight charges, insurance or installation
costs 9
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PRUDENCE/CONSERVATISM CONCEPT
Meaning
Revenues and profits are not anticipated.Only realized profits with reasonablecertainty are recognized in the profit andloss account
However, provision is made for all knownexpenses and losses whether the amountis known for certain or just an estimation
This treatment minimizes the reportedprofits and the valuation of assets
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Example
Stock valuation sticks to rule of the lower
of cost and net realizable value
The provision for doubtful debts should be
madeFixed assets must be depreciated over
their useful economic lives
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MATERIALITY CONCEPT
Meaning
Immaterial amounts may be aggregated
with the amounts of a similar nature orfunction and need not be presented
separately
Materiality depends on the size and nature
of the item
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Example
Small payments such as postage,
stationery and cleaning expenses should
not be disclosed separately. They should
be grouped together as sundry expensesThe cost of small-valued assets such as
pencil sharpeners and paper clips should
be written off to the profit and loss account
as revenue expenditures, although theycan last for more than one accounting
period
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ACCOUNTING PERIOD CONCEPT
Meaning
+Entire life of the firm is divided into timeintervals for ascertaining the profits/losses
are known as accounting periods.+Accounting period is of two types- financialyear(1stApr to 31stMarch) & calendar
year(1
st
Jan to 31
st
Dec).
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DUAL ASPECT CONCEPT
Meaning
+Every transaction recorded in books affects at
least two accounts.
+ If one is debited then the other one is creditedwith same amount.
+ This system of recording is known as DOUBLE
ENTRY SYSTEM.+ASSETS = LIABILITIES + CAPITAL
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REVENUE RECOGNITION CONCEPT
Meaning
+ Revenue means the addition to the capital as a
result of business operations.
+ Revenue is realised on three basis-:
1. Basis of cash
2.Basis of sale
3.Basis of production
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MATCHING CONCEPT
Meaning
+All the revenue of a particular period will bematched with the cost of that period for determining
the net profits of that period.+ Accordingly, for matching costs with revenue,first revenue should be recognized & then costsincurred for generating that revenue should be
recognized.
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ACCRUAL CONCEPT
Meaning
+In this concept revenue is recorded when salesare made or services are rendered & it is
immaterial whether cash is received or not.
+Same with the expenses i.e. they are recorded
in the accounting period in which they assist in
earning the revenues whether the cash is paid forthem or not.
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OBJECTIVITY CONCEPT
Meaning
The accounting information should be free from
bias and capable of independent verification
The information should be based upon verifiableevidence such as invoices or contracts
Example
The recognition of revenue should be based onverifiable evidence such as the delivery of goods
or the issue of invoices
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TIMELINESS
Meaning
+ This principle states that the information
should be provided to the users at right time for the
purpose of decision making.+ Delay in providing accounts serves no
usefulness for the users for decision making.
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CONSISTENCY CONCEPT
MeaningCompanies should choose the most
suitable accounting methods andtreatments, and consistently apply them inevery period
Changes are permitted only when the newmethod is considered better and canreflect the true and fair view of thefinancial position of the company
The change and its effect on profits shouldbe disclosed in the financial statements
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Examples
If a company adopts straight line method
and should not be changed to adoptreducing balance method in other period
If a company adopts weight-average
method as stock valuation and should not
be changed to other method e.g. first-in-first-out method
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FULL DISCLOSURE CONCEPT
Meaning
Financial statements should be prepared toreflect a true and fair view of the financial
position and performance of the enterpriseAll material and relevant information must be
disclosed in the financial statements
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UNIFORMITY CONCEPT
Meaning
Different companies within the same industry
should adopt the same accounting methods and
treatments for like transactionsThe practice enables inter-company
comparisons of their financial positions
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RELEVANCE CONCEPT
Meaning
Financial statements should be prepared
to meet the objectives of the usersRelevant information which can satisfy the
needs of most users is selected and
recorded in the financial statement
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THANK YOU!!
:::::::::::::::::::::::::::::::::::::SubmittedTo:::::::::::::::::::::::::::::::::::::::::::
Mrs. Sarika Bhatnagar
Lecturer
Financial Accounting And Auditing:::::::::::::::::::::::::::::::::::::Submitted
By:::::::::::::::::::::::::::::::::::::::::::
Isha Setia (76) Simran Yadav (1746)
Sonia Bansal (1680) Akansha Goel (423) 26