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Accounting For Decision Making: Unit-Iii Accounting Principles & Conventions

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Vishal Chandak

1) Accounting principles provide the foundation and guidelines for accounting procedures and theory. They aim to be consistently applied, reflect economic realities, and provide useful information to users. 2) Accounting conventions are the generally accepted standards, procedures, and constraints that guide reporting and business practices. They include principles like materiality, consistency, and substance over form. 3) Key concepts discussed in the document include revenue recognition, matching, cost principle, dual aspect, going concern assumption, and accrual accounting.

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Accounting For Decision Making: Unit-Iii Accounting Principles & Conventions

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Vishal Chandak
43 views24 pages
1) Accounting principles provide the foundation and guidelines for accounting procedures and theory. They aim to be consistently applied, reflect economic realities, and provide useful information to users. 2) Accounting conventions are the generally accepted standards, procedures, and constraints that guide reporting and business practices. They include principles like materiality, consistency, and substance over form. 3) Key concepts discussed in the document include revenue recognition, matching, cost principle, dual aspect, going concern assumption, and accrual accounting.

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1) Accounting principles provide the foundation and guidelines for accounting procedures and theory. They aim to be consistently applied, reflect economic realities, and provide useful information to users. 2) Accounting conventions are the generally accepted standards, procedures, and constraints that guide reporting and business practices. They include principles like materiality, consistency, and substance over form. 3) Key concepts discussed in the document include revenue recognition, matching, cost principle, dual aspect, going concern assumption, and accrual accounting.

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© All Rights Reserved
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43 views24 pages

Accounting For Decision Making: Unit-Iii Accounting Principles & Conventions

Uploaded by

Vishal Chandak
1) Accounting principles provide the foundation and guidelines for accounting procedures and theory. They aim to be consistently applied, reflect economic realities, and provide useful information to users. 2) Accounting conventions are the generally accepted standards, procedures, and constraints that guide reporting and business practices. They include principles like materiality, consistency, and substance over form. 3) Key concepts discussed in the document include revenue recognition, matching, cost principle, dual aspect, going concern assumption, and accrual accounting.

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ACCOUNTING FOR

DECISION MAKING

UNIT-III
Accounting Principles & Conventions
Accounting principles are a body of
doctrines commonly associated with
the theory and procedures of
accounting.
Based on real
assumptions

Followed
Accounting consistentl
principles y
should be

Reflect
future
predictions

Informationa
l to users
Accounting Convention refer to the general
agreement on the usage and practices in social
or economic life.

GAAP - Generally Accepted Accounting


Principles
 Accounting concepts are the foundation
of modern Accounting.

 Accounting is based on the


following concepts .
All transactions must be translated in terms
of money. If any transactions cannot be
translated in terms of money , then it
cannot come in accounts.

Example :

Loyalty of workers Skill of


management
Accounts Every debit has a credit
• double entry book & every credit has a
keeping followed debit
• Fundamental accounting
equation[Equity + Liabilities =
Assets]is based on dual
aspect.
It is a time line starting from 1st April to 31st
March

All material things which happened within these


12 months and can be measured in terms of
money must be accounted

Eg. Charging of annual depreciation to P & L a/c is


a clear example of periodicity
concept
Proprietor is independent/ different from the business.

So profits earned during the year are shown as a


liability in the books of accounts.

Owner is treated as a creditor of the business, so it is


the liability of the business to return the money to the
owner

Purpose: To eliminate personal transactions


from business transactions

 Capital is shown as a liability in the Balance Sheet


All future anticipated losses have to be taken into accounts
BUT no future gains can be taken into accounts without
realizing it.

This concept is applied especially to closing stock.

Due to conservatism concept, closing stock is valued


at COST or MARKET PRICE whichever is lower.

Provision for bad debts is made to conservatism

concept. Profits for the year are understated due to


All expenses which went towards generating sales have to
be debited in the books of accounts

Any expense which was incurred but which didn't go


towards generating sales cannot be debited

Example :

Drawings A/c Closing Stock


All assets must
appear in the
balance sheet at
the price for which
it was acquired
Profits can only be booked when
The realization principle is the concept that revenue can only be 
value of closing stock has gone up , it doesn’t mea
recognized once the underlying goods or services associated with 
the revenue have been delivered or rendered, respectively. Thus, 
revenue can only be recognized after it has been earned.

Eg. Gold bought as Rs 1 lac. Value of gold increased to Rs 100 lacs. In


the Balance Sheet, must show the value of gold at cost and not Rs
100 lacs.
After you sell the gold for Rs 100 lacs, then only you can book profits.
All important items have to be
mentioned in account.

In the absence of materiality,


wrong decisions can be taken.

Eg. Paise can be omitted in


accounts.
All expenses directly connected to a CAPITAL ASSET till it is
installed becomes part of the cost of the asset.

Pre-operating cost, Pilot Test runs (Trial runs) and Major


overhauling expenses becomes part of the cost of the
asset.

Major overhauling: Buy old machine  Repair  Renovate it

Acquisition Cost (Cost of purchase) = Cost of old machine +


Repairs + Renovation Cost

Eg. Legal fees, Installation fees for machinery, Transport


charges on purchase of furniture.
It is financial substance over legal form
Substance over form is an accounting concept which means that 
.
the economic substance of transactions and events must be 
recorded in the financial statements rather than just their legal
form in order to present a true and fair view of the affairs of the 
entity.
Flow of
money
•IAS 18 Revenue requires accountants to consider the economic
substance of the sale agreements while determining whether a sale has
occurred or not.
For example, an entity may agree to sell inventory to someone and buy
back the same inventory after a specified time at an inflated price that is
planned to compensate the seller for the time value of money. On paper,
the sale and buy back may be deemed as two different transactions which
should be dealt with as such for accounting purposes i.e. recording the sale
and (subsequently) purchase. However, the economic reality of the
transactions is that no sale has in fact occurred.

•The sale and buy back, when considered in the context of both
transactions, is actually a financing arrangement in which the seller has
obtained a loan which is to be repaid with interest (via inflated price).
Inventory acts as the security for the loan which will be returned to the
'seller' upon repayment. So instead of recognizing sale, the entity should
recognize a liability for loan obtained which shall be reversed when the
loan is repaid. The excess of loan received and the amount that is to be
paid (i.e. inflated price) is recognized as finance cost in the income
statement.
Fundamental Accounting
Assumptions are part of AS – 1
,
1 . 2. 3. Accrual
Going
Consistency concept.
concern

concept
No reason for the company to
discontinue its operations in
the near future (1yr).

If Going concern is not there , all


assets will be valued at Net
Realizable Value.(Market value)
The same set of
rules have to be
followed all the
time.
There are 2 types of accounting. One is cash accounting and
the other is mercantile accounting. Accrual concept is based
on mercantile accounting.

Income and expenses are recorded in the books of accounts


as and when they are due and not on receipt basis.

If an enterprise has enjoyed the facility but has not yet paid
for it, that amount should be recorded in the books of
accounts.
Example : Unpaid Rent

In Accrual , the cash flow is de-linked from expenses incurred or


income earned.
The Fundamental Accounting
Assumptions are unstated
assumptions.
(i.e.,) if nothing is mentioned they
have been fully followed.
Understandability

Relevance

Reliability

Comparability

Materiality

True and fair

Substance over

form

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