This document discusses key accounting concepts and conventions. The 12 accounting concepts discussed are: business entity, money measurement, going concern, accounting period, historical cost, dual aspect, revenue recognition, matching, accrual, objectivity, timeliness, and cost-benefit. The 4 accounting conventions covered are: full disclosure, consistency, conservatism, and materiality. Accounting concepts are established by law and adopted uniformly, while conventions provide guidelines based on customs that may not be adopted uniformly and allow for some personal bias.
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This document discusses key accounting concepts and conventions. The 12 accounting concepts discussed are: business entity, money measurement, going concern, accounting period, historical cost, dual aspect, revenue recognition, matching, accrual, objectivity, timeliness, and cost-benefit. The 4 accounting conventions covered are: full disclosure, consistency, conservatism, and materiality. Accounting concepts are established by law and adopted uniformly, while conventions provide guidelines based on customs that may not be adopted uniformly and allow for some personal bias.
This document discusses key accounting concepts and conventions. The 12 accounting concepts discussed are: business entity, money measurement, going concern, accounting period, historical cost, dual aspect, revenue recognition, matching, accrual, objectivity, timeliness, and cost-benefit. The 4 accounting conventions covered are: full disclosure, consistency, conservatism, and materiality. Accounting concepts are established by law and adopted uniformly, while conventions provide guidelines based on customs that may not be adopted uniformly and allow for some personal bias.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online from Scribd
This document discusses key accounting concepts and conventions. The 12 accounting concepts discussed are: business entity, money measurement, going concern, accounting period, historical cost, dual aspect, revenue recognition, matching, accrual, objectivity, timeliness, and cost-benefit. The 4 accounting conventions covered are: full disclosure, consistency, conservatism, and materiality. Accounting concepts are established by law and adopted uniformly, while conventions provide guidelines based on customs that may not be adopted uniformly and allow for some personal bias.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online from Scribd
ACCOUNTING CONCEPTS -: 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 of concepts which are usually followed for preparing the financial statements. These concepts provide a foundation for accounting process. No enterprise can prepare its financial statements without considering these concepts.
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.
2) MONEY MEASUREMENT CONCEPT
Transactions of monetary nature are recorded. Transactions of qualitative nature, even though of great importance to business are not considered.
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 on these assets. Because of this concept, outside parties enter into long term contracts with the enterprise.
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 typesfinancial year(1st Apr to 31st March) & calendar year(1st Jan to 31st Dec).
For
taxation purposes financial year is adopted as prescribed by the Govt. Companies having their shares listed on stock exchange publishes their quarterly results.
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.
JUSTIFICATION FOR HISTORICAL COST CONCEPT
This cost is objectively verifiable. Justified by going concern concept. Current values are difficult to determine. Difficult to keep track of up down of the market price.
DRAWBACKS OF HISTORICAL CONCEPT
Assets for which nothing is paid will not be recorded like reputation, brand value, etc. Information based on historical cost may not be useful to its members.
6) DUAL ASPECT CONCEPT
Every transaction recorded in books affects at least two accounts. If one is debited then the other one is credited with same amount. This system of recording is known as DOUBLE ENTRY SYSTEM. ASSETS = LIABILITIES + CAPITAL
7) REVENUE RECOGNITION/REALISATION CONCEPT
1. 2. 3.
Revenue means the addition to the capital as a result of business operations. Revenue is realised on three basis-: Basis of cash Basis of sale Basis of production
8) MATCHING CONCEPT All the revenue of a particular period will be matched with the cost of that period for determining the net profits of that period. Accordingly, for matching costs with revenue, first revenue should be recognised & then costs incurred for generating that revenue should be recognised.
Following points must be considered while matching costs with revenue-:
1. 2. 3. 4.
Outstanding expenses though not paid in cash are shown in the P&L a/c. Prepaid expenses are not shown in the P&L a/c. Closing stock should be carried over to the next period as opening stock. Income receivable should be added in the revenue & income received in advance should be deducted from revenue.
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.
10) OBJECTIVITY CONCEPT
Accounting transactions should be recorded in an objective manner, free from the personal bias of either management or the accountant who prepares the accounts. It is possible only when each transaction is supported by verifiable documents & vouchers such as cash memos, invoices.
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.
12) COST BENEFIT PRINCIPLE
This principle states that the cost incurred in applying the principles should be less than the profits derived from them.
ACCOUNTING CONVENTIONS An accounting convention may be defined as a custom or generally accepted practice which is adopted either by general agreement or common consent among accountants.
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. Proforma & contents of balance sheet & P&L a/c are prescribed by Companies Act. It does not mean that leaking out the secrets of the business.
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.
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 certainity
4) CONVENTION OF MATERIALITY According to American Accounting Association, An item should be regarded as material if there 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 user need not to be disclosed.
DIFFERENCE B/W CONCEPTS & CONVENTIONS
BASIS ACCOUNTING CONCEPTS Established By law ACCOUNTING CONVENTIONS Guidelines based upon customs or usage Biasness in adoption
Biasness
Uniformity
No space for personal biasness in the adoption Uniform adoption
"The Language of Business: How Accounting Tells Your Story" "A Comprehensive Guide to Understanding, Interpreting, and Leveraging Financial Statements for Personal and Professional Success"
"The Language of Business: How Accounting Tells Your Story" "A Comprehensive Guide to Understanding, Interpreting, and Leveraging Financial Statements for Personal and Professional Success"
