ACCOUNTING CONCEPTS AND CONVENTIONS

Presented By:

Abhimanyu 01 Ajay Rathore 02 Ajay Singh 03 Ankit Gupta 05 Ankita Kapoor - 06

Accounting
Accounting can be defined as the process
of identifying, measuring, recording and

communicating the economic events of an

organization to the interested users of the

information.

ACCOUNTING PRINCIPLES
Accounting principles can be subdivided into two categories: Accounting Concepts
Accounting Conventions.

Introduction
Accounting principles are man-made. These are based upon the logical and practical

experience of day-to-day accounting process.

A general law or rule adopted as a guide to action

ACCOUNTING CONCEPTS
Are the basic underlying assumptions that are adhered

to in the preparation of financial statements.

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. Example:
Insurance premiums for the owners house should be excluded from the

expense of the business

The owners property should not be included in the account of the

business

2) MONEY MEASUREMENT CONCEPT

Transactions of monetary nature are recorded.
Transactions of qualitative nature, even though of

great importance to business are not considered.

Market conditions, technological changes and the

efficiency of management would not be disclosed in the

accounts

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. Example:
Prepayments, depreciation provisions may be carried forward in the expectation of proper matching against the revenues of future periods

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 types- financial year(1st Apr to 31st March) & calendar year(1st Jan to 31st Dec). Calculating accounts for more than one accounting period will be tedious. 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. Example:
A fixed asset acquired at a cost of Rs.100,000 would be recorded at this

amount in the books. Even if its market value may have gone up or down in future, it should be recorded at its original cost.

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)REALISATION CONCEPT
Revenue means the addition to the capital as a result of business operations. Revenue is realized only when sale is affected or services are rendered. Example:

Profit is earned when goods or services are provided to

customers. Thus it is incorrect to record profit when order is received

8) MATCHING CONCEPT
For matching costs with revenue, first revenue

should be recognized & then costs incurred for generating that revenue should be recognized.

All the revenue of a particular period will be

matched with the cost of that period for determining the net profits of that period. Example-Salary paid in Jan 2013 relating to Dec 2012 should be treated as expenditure for year 2012 and not for 2013.

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) STABLE MONETARY UNIT CONCEPT

Financial statements must be expressed in terms of

monetary unit and it remains same throughout. It ignores the effect of rising or falling purchasing power of monetary unit due to deflation or inflation. Example- If someone purchase a piece of land in 2005 at Rs.10000, land shall continue to be valued by the business at Rs.10000.

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

The cost-benefit principle says that you should

take an action if, and only if, the extra benefit from taking it is greater than the extra cost
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. They are based on custom and are subject to change as new developments arise. The Accounting conventions are as follows:

FULL DICLOSURE CONSISTENCY CONSERVATISM MATERIALITY OBJECTIVITY

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. Any information that might be relevant to an investor or creditor should be disclosed, either in the body of the financial statements or in the notes attached thereto. 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. Example:
Depreciation method of certain fixed assets once adopted should be

used in the following years.

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 certainty

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. Example:
A stock of stationery worth Rs. 100 should be treated as an expense when it

was bought.

5) OBJECTIVITY CONCEPT
Accounting transactions should be recorded in an

objective manner. It should be free from the personal biasness of either management or the accountant who prepares the accounts. Each transaction Should be supported by verifiable documents & vouchers such as cash memos, invoices.