Accounting-Concepts & Convention

7/30/2019 Accounting-Concepts & Convention

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ACCOUNTING CONCEPTSAND CONVENTIONS

Presented By:Abhimanyu01Ajay Rathore02Ajay Singh03Ankit Gupta05Ankita Kapoor - 06


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AccountingAccounting can be defined as the process

of identifying, measuring, recording and

communicating the economic events of an

organization to the interested users of theinformation.


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ACCOUNTING PRINCIPLESAccounting principles can be subdivided

into two categories:

Accounting Concepts

Accounting Conventions.


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Introduction Accounting principles are man-made.

These are based upon the logical and practicalexperience of day-to-day accounting process.

A general law or rule adopted as a guide to action


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Are the basic underlying assumptions that are adhered

to in the preparation of financial statements.

ACCOUNTING CONCEPTS

Most of the accountants have agreed on a numberof concepts which are usually followed for

preparing the financial statements.

These concepts provide a foundation foraccounting process. No enterprise can prepare its

financial statements without considering these

concepts.


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1) BUSINESS ENTITY CONCEPT Business is treated as separate & distinct from its

members

Separate set of books are prepared. Proprietor is treated as creditor of the business.

For other business of proprietor different books are

prepared.

Example: Insurance premiums for the owners house should be excluded from the

expense of the business

The owners property should not be included in the account of the

business


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2) MONEY MEASUREMENT CONCEPT Transactions of monetary nature are recorded.

Transactions of qualitative nature, even though of

great importance to business are not considered.

Market conditions, technological changes and the

efficiency of management would not be disclosed in the

accounts


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3) GOING CONCERN CONCEPT Business will continue for a long period.

As per this concept, fixed assets are recorded at

their original cost & depreciation is charged onthese assets.

Because of this concept, outside parties enter into

long term contracts with the enterprise.

Example: Prepayments, depreciation provisions may be carried forward in the

expectation of proper matching against the revenues of future periods


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4) ACCOUNTING PERIOD CONCEPT Entire life of the firm is divided into time intervals for

ascertaining the profits/losses are known as accounting

periods.

Accounting period is of two types- financial year(1

st

Apr to31st March) & calendar year(1st Jan to 31st Dec).

Calculating accounts for more than one accounting period

will be tedious.

For taxation purposes financial year is adopted asprescribed by the Govt.

Companies having their shares listed on stock exchange

publishes their quarterly results.


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5)HISTORICAL COST CONCEPT

Assets are recorded at their original price.

This cost serves the basis for further accounting

treatment of the asset. Acquisition cost relates to the past i.e. it is known

as historical cost.

Example:

A fixed asset acquired at a cost of Rs.100,000 would be recorded at thisamount in the books. Even if its market value may have gone up or

down in future, it should be recorded at its original cost.


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6) DUAL ASPECT CONCEPT 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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7)REALISATION CONCEPT Revenue means the addition to the capital as a

result of business operations.

Revenue is realized only when sale is affected

or services are rendered.

Example: Profit is earned when goods or services are provided to

customers. Thus it is incorrect to record profit when order is

received


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8) MATCHING CONCEPT For matching costs with revenue, first revenue

should be recognized & then costs incurred forgenerating that revenue should be recognized.

All the revenue of a particular period will bematched with the cost of that period fordetermining the net profits of that period.

Example-Salary paid in Jan 2013 relating to Dec 2012should be treated as expenditure for year 2012 andnot for 2013.


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9) ACCRUAL CONCEPT In this concept revenue is recorded when sales are

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 for

them or not.


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10) STABLE MONETARY UNIT CONCEPT Financial statements must be expressed in terms of

monetary unit and it remains same throughout.

It ignores the effect of rising or falling purchasingpower of monetary unit due to deflation or

inflation.

Example- If someone purchase a piece of land in 2005

at Rs.10000, land shall continue to be valued by thebusiness at Rs.10000.


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11) TIMELINESS 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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12) COST BENEFIT PRINCIPLE The cost-benefit principle says that you should

take an action if, and only if, the extra benefit

from taking it is greater than the extra cost

This principle states that the cost incurred in

applying the principles should be less than the

profits derived from them.


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ACCOUNTING CONVENTIONS An accounting convention may be defined as a custom

or generally accepted practice which is adopted eitherby general agreement or common consent among

accountants. They are based on custom and are subject to change as

new developments arise.The Accounting conventions are as follows:

FULL DICLOSURE

CONSISTENCY CONSERVATISM

MATERIALITY

OBJECTIVITY


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1) CONVENTION OF FULL DICLOSURE Information relating to the economic affairs of the

enterprise should be completely disclosed which

are of material interest to the users.

Any information that might be relevant to an

investor or creditor should be disclosed, either in

the body of the financial statements or in the notes

attached thereto.

It does not mean that leaking out the secrets of the

business.


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2) CONVENTION OF CONSISTENCY Accounting method should remain consistent year

by year.

This facilitates comparison in both directions i.e.

intra firm & inter firm.

This does not mean that a firm cannot change the

accounting methods according to the changed

circumstances of the business. Example:

Depreciation method of certain fixed assets once adopted should be

used in the following years.


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3) CONVENTION OF CONSERVATISM All anticipated losses should be recorded but all

anticipated gains should be ignored.

It is a policy of playing safe.

Provisions is made for all losses even though the

amount cannot be determined with certainty


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4) CONVENTION OF MATERIALITY According to American Accounting Association,

An item should be regarded as material ifthere is reason to believe that knowledge of it

would influence decision of informed investor. It is an exception to the convention of full

disclosure.

Items having an insignificant effect to the userneed not to be disclosed.

Example: A stock of stationery worth Rs. 100 should be treated as an expense when it

was bought.


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5) OBJECTIVITY CONCEPT Accounting transactions should be recorded in an

objective manner.

It should be free from the personal biasness of

either management or the accountant who prepares

the accounts.

Each transaction Should be supported by verifiable

documents & vouchers such as cash memos,invoices.


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