Accounting+Concepts+&+Conventions (1)

8/2/2019 Accounting+Concepts+&+Conventions (1)

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ACCOUNTING

CONCEPTS AND

CONVENTIONS

BY-:MANMOHAN GUPTA 01


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CONTENTS-:Accounting Concepts

MeaningTypes

Accounting Conventions.Meaning

Types.

Difference B/w Accounting Concepts& Conventions..


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ACCOUNTING CONCEPTS -:

In order to make the accounting language conveythe same meaning to all people & to make it more

meaningful, most of the accountants have agreedon a number of concepts which are usuallyfollowed for preparing the financial statements.

These concepts provide a foundation for

accounting process. No enterprise can prepare itsfinancial statements without considering these

concepts.


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1) BUSINESS ENTITY CONCEPT

Business is treated as separate & distinctfrom its members

Separate set of books are prepared.

Proprietor is treated as creditor of thebusiness.

For other business of proprietor differentbooks are prepared.


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2) MONEY MEASUREMENTCONCEPT

Transactions of monetary nature arerecorded.

Transactions of qualitative nature, eventhough of great importance to businessare not considered.


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3) GOING CONCERN CONCEPT

Business will continue for a long period.

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

Because of this concept, outside partiesenter into long term contracts with theenterprise.


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4) ACCOUNTING PERIOD CONCEPT

Entire life of the firm is divided intotime intervals for ascertaining the

profits/losses are known as accountingperiods.

Accounting period is of two types-financial year(1st Apr to 31st March) &

calendar year(1st Jan to 31st Dec).


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For taxation purposes financialyear is adopted as prescribed by theGovt.

Companies having their shareslisted on stock exchange publishestheir quarterly results.


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5) HISTORICAL COST CONCEPT

Assets are recorded at their original price.

This cost serves the basis for furtheraccounting treatment of the asset.

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


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JUSTIFICATION FOR HISTORICALCOST 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.


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DRAWBACKS OF HISTORICALCONCEPT

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

Information based on historical cost maynot be useful to its members.


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6) DUAL ASPECT CONCEPT

Every transaction recorded in booksaffects at least two accounts.

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

This system of recording is known asDOUBLE ENTRY SYSTEM.

ASSETS = LIABILITIES + CAPITAL

7) REVENUE


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7) REVENUERECOGNITION/REALISATION

CONCEPT 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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8) MATCHING CONCEPT

All the revenue of a particular period willbe matched with the cost of that periodfor determining the net profits of that

period.Accordingly, for matching costs with

revenue, first revenue should berecognised & then costs incurred forgenerating that revenue should berecognised.


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Following points must be considered whilematching costs with revenue-:

1. Outstanding expenses though not paid in cashare shown in the P&L a/c.

2. Prepaid expenses are not shown in the P&L

a/c.3. Closing stock should be carried over to the

next period as opening stock.

4. Income receivable should be added in the

revenue & income received in advance shouldbe deducted from revenue.


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9) ACCRUAL CONCEPT

In this concept revenue is recorded whensales are made or services are rendered &it is immaterial whether cash is received or

not.

Same with the expenses i.e. they arerecorded in the accounting period in which

they assist in earning the revenueswhether the cash is paid for them or not.


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10) OBJECTIVITY CONCEPT

Accounting transactions should be recordedin an objective manner, free from thepersonal bias of either management or the

accountant who prepares the accounts. Itis possible only when each transaction issupported by verifiable documents &

vouchers such as cash memos, invoices.


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11) TIMELINESS

This principle states that the informationshould be provided to the users at righttime for the purpose of decision making.

Delay in providing accounts serves nousefulness for the users for decisionmaking.


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12) COST BENEFIT PRINCIPLE

This principle states that the cost incurredin applying the principles should be lessthan the profits derived from them.


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ACCOUNTING CONVENTIONS

An accounting convention may be definedas a custom or generally accepted practicewhich is adopted either by general

agreement or common consent amongaccountants.


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1) CONVENTION OF FULLDICLOSURE

Information relating to the economicaffairs of the enterprise should becompletely 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 thesecrets of the business.


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2) CONVENTION OF CONSISTENCY

Accounting method should remainconsistent year by year.

This facilitates comparison in bothdirections i.e. intra firm & inter firm.

This does not mean that a firm cannotchange the accounting methods accordingto the changed circumstances of thebusiness.


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3) CONVENTION OFCONSERVATISM

All anticipated losses should be recordedbut all anticipated gains should beignored.

It is a policy of playing safe.

Provisions is made for all losses eventhough the amount cannot be determinedwith certainity


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4) CONVENTION OF MATERIALITY

According toAmerican AccountingAssociation,An item should be regarded asmaterial if there is reason to believe that

knowledge of it would influence decision ofinformed investor.

It is an exception to the convention of fulldisclosure.

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


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DIFFERENCE B/W CONCEPTS &CONVENTIONS

BASIS ACCOUNTINGCONCEPTS

ACCOUNTINGCONVENTIONS

Established By law Guidelines based

upon customs orusage

Biasness No space forpersonalbiasness in theadoption

Biasness inadoption

Uniformity Uniform

adoption

No uniform

adoption


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THEEND

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Accounting+Concepts+&+Conventions (1)