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Accounting concepts and conventions

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Accounting concepts and conventions

  1. 1. AccountingConcepts andConventions
  2. 2. Accounting Concepts
  3. 3. The term ‘concept’ is used to connoteaccounting postulates, that isnecessary assumptions and conditionsupon which accounting is based.These are the theories on how andwhy certain categories of transactionsshould be treated in a particularmanner.
  4. 4. Business EntityConcept
  5. 5. • The business and its owner(s) are two separate entities
  6. 6. The Books Of Accountsare prepared from the point of view of the business Hence…
  7. 7. Capital (Liability)Drawings (Asset)
  8. 8. The Personal Transactions of the Owner are not recorded. For Example: A Car purchased by the owner for personal use is not Recorded in the Books Of Account Of the Business.
  9. 9. GoingConcernConcept
  10. 10. It is assumed that the entity is a going concern, i.e., it will continue to operate for an indefinitely longperiod in future and transactions are recorded from this point of view.
  11. 11. MoneyMeasurement Concept
  12. 12. In accounting, a record is made only of those transactions or eventswhich can be measured and expressed in terms of money.
  13. 13. Non monetary transactions are not recorded in accounting. Innovativeness Attitude Experience skill Team work Honesty Passion
  14. 14. Accounting Period Concept
  15. 15. For measuring the financial resultsof a business periodically, theworking life of an undertaking issplit into convenient short periodscalled accounting period.
  16. 16. Cost Concept
  17. 17. An asset acquired by a concern isrecorded in the books of accountsat historical cost (i.e., at the priceactually paid for acquiring theasset). The market price of theasset is ignored.
  18. 18. Historical Cost Of Market Value Of
  19. 19. Dual - Aspect Concept
  20. 20. For Every Debit, there is a CreditEvery transaction shouldhave a two- sided effect to the extent of same amount
  21. 21. For Example: Cash Sales Rs. 10,000Debit • Cash Account Rs. 10,000Credit • Sales Account Rs. 10,000
  22. 22. For Example: Purchased From Ram goods worth Rs. 20,000 and discount received Rs. 2,000.Debit • Purchases Account Rs. 20,000 • Ram’s Account Rs. 18,000Credit • Discount Recd. Account 2,000
  23. 23. This Concept has resulted in THEACCOUNTING EQUATION
  24. 24. Realisation Concept
  25. 25. Profit is earned when goodsor services are provided/transferred to customers.Thus it is incorrect to recordprofit when order isreceived, or when thecustomer pays for the goods.
  26. 26. MatchingConcept
  27. 27. The matching principle ensures thatrevenues and all their associated expenses are recorded in the same accounting period. The matching principle is the basis onwhich the accrual accounting method of book- keeping is built.
  28. 28. For ExampleSalary paid in 2012-13 relating to 2011-12Such salary is treated as Expenditure for2011-12 under Outstanding SalariesAccount, not for the year 2012-13
  29. 29. AccountingConventions
  30. 30. Accounting Conventions are thecommon practices which areuniversally followed in recordingand presenting accounting informationof business. It helps in comparingaccounting data of different business orof same units for different periods.
  31. 31. Materiality
  32. 32. Only those transactions,important facts and itemsare shown which are usefuland material for thebusiness. The firm need notrecord immaterial andinsignificant items.
  33. 33. Illustration:Company XYZ Ltd. bought 6 months supplies ofstationary worth $600.Question:Should the Company spread the cost of this stationaryfor 6 months by expensing off $100 per month to theincome statement?Answer:Based on this concept, as the amount is so small orimmaterial, it can be expensed off in the next monthinstead of tediously expensing it in the next 6 months.
  34. 34. FullDisclosure
  35. 35. Financial Statements and their notes should present all information that is relevant and material to theuser’s understanding of the statements.
  36. 36. Conservatism
  37. 37. Anticipate No Profits but Provide for all Losses Accountant should always be on side of safety.
  38. 38. For Example • Making Provision for Bad and Doubtful Debts • Showing Depreciation on Fixed Assets, but not appreciation
  39. 39. Consistency
  40. 40. The accounting practices andmethods should remain consistentfrom one accounting period to another.Whatever accounting practice isfollowed by the business enterprise,should be followed on a consistentbasis from year to year.
  41. 41. For Example Year 2009-10 2010-11 2011-12 Method of • Straight • Written • Units ofDepreciation Line Down Measure followed Method Value Method Method
  42. 42. Thank you

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