ACCOUNTINGACCOUNTING CONCEPTS AND CONCEPTS AND CONVENTIONSCONVENTIONS

BY-: BY-: PRIYASH 0129618 PRIYASH 0129618 NIKHIL 0129626 NIKHIL 0129626

ACNOWLEDGEMENTACNOWLEDGEMENT

We would like to thanks We would like to thanks Ms. Ms. MeenakshiMeenakshi Gupta (Lecturer)Gupta (Lecturer) for for assigning this work & without her assigning this work & without her guidance this work is not possible.guidance this work is not possible.

CONTENTS-:CONTENTS-:Accounting Concepts……………Accounting Concepts…………… Meaning……… Meaning……… Types………… Types…………

Accounting Conventions……….Accounting Conventions………. Meaning……… Meaning……… Types…………. Types………….

Difference B/w Accounting Difference B/w Accounting Concepts & Concepts & Conventions…………………..Conventions…………………..

ACCOUNTING CONCEPTS -:ACCOUNTING CONCEPTS -:

In order to make the accounting language In order to make the accounting language convey the same meaning to all people & to convey the same meaning to all people & to

make it more meaningful, most of the make it more meaningful, most of the accountants have agreed on a number of accountants have agreed on a number of concepts which are usually followed for concepts which are usually followed for

preparing the financial statements. These preparing the financial statements. These concepts provide a foundation for accounting concepts provide a foundation for accounting

process. No enterprise can prepare its process. No enterprise can prepare its financial statements without considering financial statements without considering

these concepts.these concepts.

1) BUSINESS ENTITY CONCEPT1) BUSINESS ENTITY CONCEPT

Business is treated as separate & Business is treated as separate & distinct from its membersdistinct from its members

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

the business.the business. For other business of proprietor For other business of proprietor

different books are prepared.different books are prepared.

2) MONEY MEASUREMENT 2) MONEY MEASUREMENT CONCEPT CONCEPT

Transactions of monetary nature are Transactions of monetary nature are recorded.recorded.

Transactions of qualitative nature, Transactions of qualitative nature, even though of great importance to even though of great importance to business are not considered.business are not considered.

3) 3) GOINGGOING CONCERN CONCERN CONCEPTCONCEPT

Business will continue for a long Business will continue for a long period.period.

As per this concept, fixed assets are As per this concept, fixed assets are recorded at their original cost & recorded at their original cost & depreciation is charged on these depreciation is charged on these assets.assets.

Because of this concept, outside Because of this concept, outside parties enter into long term contracts parties enter into long term contracts with the enterprise.with the enterprise.

4) ACCOUNTING PERIOD 4) ACCOUNTING PERIOD CONCEPTCONCEPT

Entire life of the firm is divided Entire life of the firm is divided into time intervals for ascertaining into time intervals for ascertaining the profits/losses are known as the profits/losses are known as accounting periods.accounting periods.

Accounting period is of two types- Accounting period is of two types- financial year(1financial year(1stst Apr to 31 Apr to 31stst March) March) & calendar year(1& calendar year(1stst Jan to 31 Jan to 31stst Dec).Dec).

For taxation purposes financial For taxation purposes financial year is adopted as prescribed year is adopted as prescribed by the Govt.by the Govt.

Companies having their shares Companies having their shares listed on stock exchange listed on stock exchange publishes their quarterly results.publishes their quarterly results.

5) HISTORICAL COST CONCEPT5) HISTORICAL COST CONCEPT

Assets are recorded at their original Assets are recorded at their original price.price.

This cost serves the basis for further This cost serves the basis for further accounting treatment of the asset.accounting treatment of the asset.

Acquisition cost relates to the past Acquisition cost relates to the past i.e. it is known as historical cost.i.e. it is known as historical cost.

JUSTIFICATION FOR JUSTIFICATION FOR HISTORICAL COST CONCEPTHISTORICAL COST CONCEPT

This cost is objectively verifiable.This cost is objectively verifiable. Justified by going concern concept.Justified by going concern concept. Current values are difficult to Current values are difficult to

determine.determine. Difficult to keep track of up down of Difficult to keep track of up down of

the market price.the market price.

DRAWBACKS OF HISTORICAL DRAWBACKS OF HISTORICAL CONCEPTCONCEPT

Assets for which nothing is paid will Assets for which nothing is paid will not be recorded like reputation, not be recorded like reputation, brand value, etc.brand value, etc.

Information based on historical cost Information based on historical cost may not be useful to its members.may not be useful to its members.

6) DUAL ASPECT CONCEPT6) DUAL ASPECT CONCEPT

Every transaction recorded in books Every transaction recorded in books affects at least two accounts.affects at least two accounts.

If one is debited then the other one If one is debited then the other one is credited with same amount.is credited with same amount.

This system of recording is known This system of recording is known as “DOUBLE ENTRY SYSTEM”.as “DOUBLE ENTRY SYSTEM”.

ASSETS = LIABILITIES + CAPITALASSETS = LIABILITIES + CAPITAL

7) REVENUE 7) REVENUE RECOGNITION/REALISATION RECOGNITION/REALISATION

CONCEPTCONCEPT Revenue means the addition to the Revenue means the addition to the

capital as a result of business capital as a result of business operations.operations.

Revenue is realised on three Revenue is realised on three basis-:basis-:

1.1. Basis of cashBasis of cash

2.2. Basis of saleBasis of sale

3.3. Basis of productionBasis of production

8) MATCHING CONCEPT8) MATCHING CONCEPT

All the revenue of a particular period All the revenue of a particular period will be matched with the cost of that will be matched with the cost of that period for determining the net profits period for determining the net profits of that period.of that period.

Accordingly, for matching costs with Accordingly, for matching costs with revenue, first revenue should be revenue, first revenue should be recognised & then costs incurred for recognised & then costs incurred for generating that revenue should be generating that revenue should be recognised.recognised.

Following points must be considered Following points must be considered while matching costs with while matching costs with

revenue-:revenue-:

1.1. Outstanding expenses though not paid in Outstanding expenses though not paid in cash are shown in the P&L a/c.cash are shown in the P&L a/c.

2.2. Prepaid expenses are not shown in the Prepaid expenses are not shown in the P&L a/c.P&L a/c.

3.3. Closing stock should be carried over to Closing stock should be carried over to the next period as opening stock.the next period as opening stock.

4.4. Income receivable should be added in Income receivable should be added in the revenue & income received in the revenue & income received in advance should be deducted from advance should be deducted from revenue.revenue.

9) ACCRUAL CONCEPT9) ACCRUAL CONCEPT

In this concept revenue is recorded In this concept revenue is recorded when sales are made or services are when sales are made or services are rendered & it is immaterial whether rendered & it is immaterial whether cash is received or not.cash is received or not.

Same with the expenses i.e. they are Same with the expenses i.e. they are recorded in the accounting period in recorded in the accounting period in which they assist in earning the which they assist in earning the revenues whether the cash is paid revenues whether the cash is paid for them or not.for them or not.

10) OBJECTIVITY CONCEPT10) OBJECTIVITY CONCEPT

Accounting transactions should be Accounting transactions should be recorded in an objective manner, recorded in an objective manner, free from the personal bias of either free from the personal bias of either management or the accountant who management or the accountant who prepares the accounts. It is possible prepares the accounts. It is possible only when each transaction is only when each transaction is supported by verifiable documents & supported by verifiable documents & vouchers such as cash memos, vouchers such as cash memos, invoices.invoices.

11) TIMELINESS11) TIMELINESS

This principle states that the This principle states that the information should be provided to information should be provided to the users at right time for the the users at right time for the purpose of decision making.purpose of decision making.

Delay in providing accounts serves Delay in providing accounts serves no usefulness for the users for no usefulness for the users for decision making.decision making.

12) COST BENEFIT PRINCIPLE12) COST BENEFIT PRINCIPLE

This principle states that the cost This principle states that the cost incurred in applying the principles incurred in applying the principles should be less than the profits should be less than the profits derived from them.derived from them.

ACCOUNTING CONVENTIONSACCOUNTING CONVENTIONS

An accounting convention may be An accounting convention may be defined as a custom or generally defined as a custom or generally accepted practice which is adopted accepted practice which is adopted either by general agreement or either by general agreement or common consent among common consent among accountants. accountants.

1) CONVENTION OF FULL 1) CONVENTION OF FULL DICLOSUREDICLOSURE

Information relating to the economic Information relating to the economic affairs of the enterprise should be affairs of the enterprise should be completely disclosed which are of completely disclosed which are of material interest to the users.material interest to the users.

Proforma & contents of balance sheet Proforma & contents of balance sheet & P&L a/c are prescribed by & P&L a/c are prescribed by Companies Act.Companies Act.

It does not mean that leaking out the It does not mean that leaking out the secrets of the business.secrets of the business.

2) CONVENTION OF 2) CONVENTION OF CONSISTENCYCONSISTENCY

Accounting method should remain Accounting method should remain consistent year by year.consistent year by year.

This facilitates comparison in both This facilitates comparison in both directions i.e. intra firm & inter firm.directions i.e. intra firm & inter firm.

This does not mean that a firm This does not mean that a firm cannot change the accounting cannot change the accounting methods according to the changed methods according to the changed circumstances of the business.circumstances of the business.

3) CONVENTION OF 3) CONVENTION OF CONSERVATISMCONSERVATISM

All anticipated losses should be All anticipated losses should be recorded but all anticipated gains recorded but all anticipated gains should be ignored.should be ignored.

It is a policy of playing safe.It is a policy of playing safe. Provisions is made for all losses even Provisions is made for all losses even

though the amount cannot be though the amount cannot be determined with certainitydetermined with certainity

4) CONVENTION OF 4) CONVENTION OF MATERIALITYMATERIALITY

According to According to American Accounting American Accounting AssociationAssociation, , ““An item should be regarded An item should be regarded as material if there is reason to believe as material if there is reason to believe that knowledge of it would influence that knowledge of it would influence decision of informed investor.”decision of informed investor.”

It is an exception to the convention of full It is an exception to the convention of full disclosure.disclosure.

Items having an insignificant effect to the Items having an insignificant effect to the user need not to be disclosed.user need not to be disclosed.

DIFFERENCE B/W CONCEPTS & DIFFERENCE B/W CONCEPTS & CONVENTIONSCONVENTIONS

BASISBASIS ACCOUNTING ACCOUNTING CONCEPTSCONCEPTS

ACCOUNTING ACCOUNTING CONVENTIONCONVENTIONSS

EstablisheEstablishedd

By lawBy law Guidelines Guidelines based upon based upon customs or customs or usageusage

Biasness Biasness No space for No space for personal personal biasness in the biasness in the adoptionadoption

Biasness in Biasness in adoptionadoption

Uniformity Uniformity Uniform Uniform adoption adoption

No uniform No uniform adoptionadoption

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