Accounting Concepts

Accounting Concepts and Conventions
Semester I
In drawing up accounting statements, whether they are external "financial accounts" or internally-focused "management accounts", a clear objective has to be that the accounts fairly reflect the true "substance" of the business and the results of its operation. Therefore an accountant needs to follow certain rules while: recording business transactions preparing accounts and financial statements Main objective of accounting concepts: uniformity consistency
Purpose
Meaning
Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions and preparing accounts. Accounting Conventions are principles or accepted practices which apply generally to transactions.
Accounting Concepts
Business entity concept Money measurement concept Going concern concept Accounting period concept Accounting cost concept Dual aspect concept Realization concept Accrual concept Matching concept
Business Entity Concept

For accounting purpose, business enterprise and its owners are two separate and independent entities Financial statements are prepared from the point of view of business entity and maintained in the name of the company This concept helps in ascertaining the profit/loss of the business alone
Money Measurement Concept

Only transactions/events that can be expressed in terms of money (currency of the country) are recorded Records are to be maintained in monetary unit and not physical unit This concept guides the accountant in deciding transactions/events which should be recorded It also facilitates comparison of business performance of two different periods of the same firm or of the two different firms for the same period.
Going Concern Concept

Going concern concept assumes that an enterprise will continue in operational existence for the foreseeable future and will have an indefinite life Every business entity has continuity of life until it files for bankruptcy Thus, it will not be dissolved in the near future and assures the investors that they will continue to get income on their investments.
Accounting Period Concept

As per accounting period concept, all the transactions are recorded in the books of accounts for a specified period of time. Periodicity says that the life of business is divided into equal time intervals for the purpose of: calculating profit earned or loss incurred tax computation distribution of dividends analysis of the business by banks, creditors, etc. Each interval is called Accounting Period Balance Sheet and Profit & Loss Account should be prepared for each accounting period
Historical Cost Concept

The original cost of fixed assets in the books of accounts is their purchase price that includes cost of acquisition, transportation and installation Fixed assets are recorded at a price paid for them (verified from the supporting documents) and not their market price Fixed assets are recorded at their book value in the balance sheet i.e. original cost less depreciation
Dual Aspect Concept

Dual aspect is the foundation or basic principle of accounting This concept assumes that every transaction has a dual effect, i.e. it affects two accounts Therefore, any transaction should be recorded at two places The duality concept is commonly expressed in terms of fundamental accounting equation: Assets = Liabilities + Capital This concept helps an accountant in detecting error
Realization Concept
This concept states that revenue from any business transaction should be included in the accounting records only when it is realised The term realisation means creation of legal right to receive money Selling goods is realization, receiving order is not The concept of realisation states that revenue is realized at the time when goods or services are actually delivered
Accrual Concept
The meaning of accrual is something that becomes due It means that revenues are recognised when they become receivable and expenses are recognised when they become payable without regard to the time of cash receipt or cash payment. Both transactions will be recorded in the accounting period to which they relate.
Matching Concept
The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period The concept guides how the expenses should be matched with revenue for determining exact profit or loss for a particular period Depreciation on fixed assets is charged based on this concept
Accounting Conventions
1. 2. 3. 4. Convention of Full Disclosure Convention of Materiality Convention of Consistency Convention of Conservatism
1. Convention of Full Disclosure: The accounting convention of full disclosure implies that accounts should make a full disclosure of all monetary or financial information that can impact decision making of different parties
2. Convention of Materiality: The convention of materiality proposes that while accounting for various transactions, only those transactions should be considered which have material impact on the profitability or the financial status of the organization. Similarly, insignificant transactions or items, such as postage stamps lying unused, at the end of the accounting period will be ignored. Material information is the information that enables any prudent person to arrive at a decision
3. Convention of Consistency: The convention of consistency specifies that the accounting practices and methods used by an organization should remain consistent over the years. Vertical consistency is maintained within inter-related financial statements of the same period. The performance of the company in one year with the performance in the next year or another year should be such that it can be compared. This is referred to as horizontal consistency. The comparison of the performance of one company with that of another company in the same industry can also be done. This is often referred to as third dimensional consistency 4. Convention of Conservatism: The convention of conservatism follows the policy of cautiously creating financial statements in a conservative manner. This principle considers all prospective losses and ignores all perspective gains.

Accounting Concepts

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Accounting Concepts

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Accounting Concepts and Conventions

Business Entity Concept

Money Measurement Concept

Going Concern Concept

Accounting Period Concept

Historical Cost Concept

Dual Aspect Concept

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