ACCOUNTING CONCEPTS

AND CONVENTIONS
UNIT - I
Accounting Principles
What do you mean by Accounting Principles.
According to the American Institute of Public
Accountants Accounting principles are the general
laws or rules adopted or professed as a guide to action.
It is a basis of conduct or practice.

Characteristics of Accounting principles:
1. These rules are based on the custom, usages and
traditions.
2. These principles are dynamic and not fixed or rigid.
3. They are designed to make accounting data provide
objectivity, application, usefulness and simplicity to its
users.

Kinds of Accounting
Principles




Concepts Conventions

1. Entity Concept
2. Money Measurement
3. Accounting Period Concept
4. Going Concern Concept
5. Cost Concept
6. Dual Aspect Concept
7. Matching Principle
8. Verifiable Objects
9. Realization Concept
10. Capital Concept
11. Accrual concept
12. True legal position (Full Disclosure)

1. Disclosure Convention
2. Materiality Convention
3. Consistency Convention
4. Conservation Convention
5. Cost Benefit Convention






Entity Concept

Business is treated as a unit or entity apart
from its owners, creditors and others.
Business transactions are recorded in the
books of accounts from the view point of
the business.
Even the proprietor is treated as a creditor
to the extent of his capital.

Cont
Accounting Period Concept
Necessary to close the accounts at regular
intervals.
Usually a period of 365 days or 52 weeks or 1
year is considered as the accounting period.
Money Measurement
Business transactions and events which are of
financial nature are only recorded.

Cont
Going Concern Assumption
The business will exist for a long period and
transactions are recorded from this point of
view.
Historical Cost Concept
Assets are recorded at the price paid to acquire
them and this cost is the basis for all subsequent
accounting for the asset.




Dual Aspect Concept
Dual aspect principle is the basis for Double
Entry System of book-keeping.
All business transactions recorded in
accounts have two aspects - receiving
benefit and giving benefit.
For example, when a business acquires an asset
(receiving of benefit) it must pay cash (giving
of benefit).
Cont
Matching Concept
Matching the revenues earned during an
accounting period with the cost associated with
the period to ascertain the result of the business.
Verifiable & Objective Evidence Concept
Each recorded business transactions in the
books of accounts should have an adequate
evidence to support it.
Cont
Revenue Realisation Concept
Revenue is considered as the income earned on
the date when it is realised.
Unearned or unrealised revenue should not be
taken into account.
Full Disclosure Concept
Accounting statements should disclose fully
and completely all the significant information.
Conventions
Materiality Principle
The materiality principle requires all relatively
relevant information should be disclosed in the
financial statements.
Consistency principle
The aim of consistency principle is to preserve
the comparability of financial statements.
The rules, practices, concepts and principles
used in accounting should be continuously
observed and applied year after year.

Cont
Prudence (Conservatism) Principle
Prudence principle takes into consideration all
prospective losses but leaves all prospective
profits.
The essence of this principle is anticipate no
profit and provide for all possible losses.
Cost Benefit Principle
This modifying principle states that the cost of
applying a principle should not be more than
the benefit derived from it.
Double Entry System
Meaning Of Double Entry System:
According to William Pickles Every business
transaction has two fold effects and it affects two
accounts. I n order to keep a complete record of a
transaction, one account is bound to be debited and the
other is bound to be credited. Recording this two-fold
effect of each transaction is called as Double Entry
System.
Characteristics Of Double Entry System:
1. Effects on two accounts or parties.
2. Simultaneous recording
3. Contra-position of two accounts
4. Definite rules of recording
5. Two aspects of transaction.
Objective of Double-Entry System
1. To facilitate the verification of accuracy of
accounting.
2. To know the position of profit or loss and the
financial results with the help of Trial Balance.
3. To know the progress of the business at the end of
each accounting period.
4. To check and control misappropriation and
defalcation by employees.
5. To have proper and systematic record of business
for future reference.
Stages of recording under DES
The entire accounting process is divided into 3
main stages:
1. Original Record: The books in which the transaction is recorded
for the first time is called as Book of Original Entry. It is also known
as Journal.
2. Classification: All the transactions recorded in the journal are
sorted into different accounts. The information pertaining to particular
individual or party or item in different dates are recorded under one
head identified by the name of the person, party or item concern, (also
called as account). Such a recording is called Posting in
Ledger.Ledger is also called as the Book of Final Entry.
3. Final Accounts: After recording and classification, a summary is
drafted to ascertain the position of the business. In this respect, Trial
balance, Trading& Profit and Loss a/c and Balance Sheet is prepared.
These documents together are termed as Final Accounts.
What do you mean by Accounts
Accounts denotes the date-wise record of all the dealings pertaining to a
particular person, party, property, goods, services, expenses, income, gains
and losses in one head at one place according to certain rules.
Types of Accounts
Natural
Person
Intangible Assets
Tangible Assets
Artificial
Person
Representative
person
Real
Accounts
Nominal
Accounts
Personal Accounts
Impersonal Accounts
Journal
Meaning of Journal:
According to Rolland "Journal is the book of
original records in which a businessman enters all
his daily transactions, it shows which account is
debited and which one is credited.
According to L.C.Copper Journal is the book of
original record which is kept for the purpose of
sorting and classification of transactions, so that the
same may be conveniently recorded later on in the
ledger.
The process of recording the transaction in the
books of original records is called journalising.

Specimen/Proforma Of Journal




Explanation of the profoma:
Journal contains 5 columns.
1. Date: In this column the date on which transaction takes
place is entered.
2. Particulars: The transaction of the business is recorded
in the particulars column based on the rules of journalising.
Points to be remembered for recording in the particulars
column: -



Journal Entries in the Books Of ---------
Date Particulars L.
F.
Debit
(Rs.)
Credit
(Rs.)
a) The names of 2 accounts affected in the transaction are
written in two lines.
b) In the 1
st
line, account which is to be debited is written and
the abbreviation for debit Dr.is suffixed.
c) In the second line, the recording starts by leaving a little
space from the margin and than the account to be credited
is written and it begins with the word To.
d) Below the credit account in the next line a short
description, called as narration of the transaction is
written in the brackets starting with either Being or
For.
e) In the end after the narration a horizontal line in drawn in
the particulars to signify the end of the transaction.
3. Ledger Folio (L.F.): Folio means page. Every transaction entered
in the journal is posting in the ledger. So in this column the number of
page of the ledger, wherein the transaction has been posted, is entered.
4. Debit Amount: This column carries the amount against the account
which has been debited.
5. Credit Amount: This column carries the amount against the
account which has been credited.
Balancing of the Journal
The total of both the debit and the credit side of each page
is calculated and carried forward to the next page.
The balance at the end of the page is indicated by c/f
which means carried forward Or by b/f as brought
forward.
The balance in the beginning of the next page is indicated
by b/d which means bought down.

Rules Of Debit and Credit
Personal Account Real Account Nominal Account
Dr.
What comes in
Cr.
What goes out
Dr.
All expenses
& losses
Cr.
All incomes &
gains
Dr.
The receiver
Cr.
The giver
Journal Entries
Journalise the following transaction: -
1. 1
st
Jan: Commenced business with cash Rs. 1,00,000/-, stock Rs. 5,000/-
and furniture Rs.13,000/-
2. 3
rd
Jan: Goods purchased from Hari Rs.8,000/-
3. 5
th
Jan: Sold goods to Narendra Rs.4,000/-
4. 6
th
Jan:Goods for Rs.2,000/- bought from Hari was returned.
5. 7
th
Jan: Sold goods to Zain for cash Rs.6,000/-
6. 9
th
Jan: Goods worth Rs.1,000/- sold to Narendra were returned by him.
7. 10
th
Jan: Paid salary to Ashok Rs.1,500/-
8. 11
th
Jan: Rent paid in advance Rs.500/-
9. 12
th
Jan: Paid to Hari Rs.5950/- in full settlement of his account.
10. 13
th
Jan: Received cash from Narendra, after a discount of Rs100/-, in
full settlement of his account.
11. 14
th
Jan: Sunil, a debtor for Rs. 2,000/- was declared insolvent and only
45paise in a rupee could be recovered from his private estate.
12. 15
th
Jan: Withdrew goods of Rs.300/- and cash Rs.500/- for private use.



13. 18
th
Jan: The salary for 3 months amounting to Rs.1,200/- is due ( not
yet paid)
14. 19
th
Jan: Sold to Mohit goods worth Rs.5,000/- at 10% trade discount,
it was also decide to offer him a discount of 2% at the time of payment.
The payment was made on 25
th
Jan.
15. 20
th
Jan: Goods worth Rs.300/- stolen by the employees, goods worth
Rs.500 was given as charity and goods worth Rs. 400/- distributed as
free samples.
16. 21
st
Jan: Purchased Office equipments for Rs.8,000/-, Land Rs.15,000/-
and Machinery Rs.20,000/-
17. 31
st
Jan: Depreciation on furniture @ 10%p.a.
18. Opened a current a/c with bank Rs. 2000
19. Received Interest in advance for three months Rs. 400
20. Paid in wages by cheques Rs. 500






The Financial Reporting
Environment

GAAP


Objective of financial reporting
To provide financial information about the reporting entity
that is useful to existing and potential investors, lenders and
other creditors in making decisions about buying, selling, or
holding on to an investment in the shares of the entity, and
providing or settling loans and other forms of credit.

What is Generally Accepted Accounting Practice
(GAAP)?
GAAP is documented in a set of published standards which
are collectively referred to as Generally Accepted
Accounting Practice.
GAAP consists of a number of practices and principles that
govern how the financial events of a business are
recognised, measured and reported.
GAAP is formulated by representatives of the various
interest groups (for example, accountants, academics,
business people, regulators. and representatives of various
industries).


Background to development of GAAP
Initially, most countries developed their own GAAP.
Globalisation and dual listings highlighted the need for a
globalised set of GAAP standards that could be used by all
countries.
Investors lacked useful financial information, so
accountants responded to the needs of the global investors
by initiating the development of unified accounting
standards.
The movement towards unified standards was motivated by
economic and market forces.


GAAP standards
Currently two main sets of GAAP standards world-wide:
International Financial Reporting Standards (IFRS), developed
by International Accounting Standards Board (IASB), and
US GAAP, developed and approved by the United States of
America's (US) Financial Accounting Standards Board (FASB)
Through the current convergence processes between the IASB and
FASB, internationally we are approaching a critical juncture in the
path towards a single set of high-quality accounting standards.
All listed companies in South Africa have to comply with IFRS.

Who develops IFRS?
International Accounting Standards Board (IASB)
Members from many different countries
IASB consults with:
Stock exchanges
Technical directors of audit firms
Preparers of financial statements
Users of financial statements
PROCESS IS VERY TRANSPARENT



IFRS interpretations
International Financial Reporting Interpretations Committee
(IFRIC) issues interpretation guidelines.
IFRIC reviews both newly-identified financial reporting
issues not specifically addressed in IFRS and issues where
unsatisfactory or conflicting interpretations have developed.
IFRIC provides interpretative guidance with a view to
reaching consensus on the appropriate treatment of certain
aspects of specific IFRS.
The interpretations issued by the IFRIC are called IFRIC1,
IFRIC2, and so on (previously SIC1).


Compliance with IFRS
Preparing financial statements in compliance with IFRS
In order for an entity to state that it has prepared its financial
statements in accordance with IFRS, the entity has to
comply with not only all of the standards but also all of the
interpretation standards.