ACCOUNTING CONCEPTS -: In order to make the accounting language convey the same meaning to all people & to make it more meaningful, 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.
2) MONEY MEASUREMENT CONCEPT
Transactions of monetary nature are recorded.
Transactions of qualitative nature, even though of great importance to business are not considered.
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.
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(1 st Apr to 31 st March) & calendar year(1 st Jan to 31 st Dec).
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.
JUSTIFICATION FOR HISTORICAL COST 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.
DRAWBACKS OF HISTORICAL CONCEPT
Assets for which nothing is paid will not be recorded like reputation, brand value, etc.
Information based on historical cost may not be useful to its members.
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) REVENUE RECOGNITION/REALISATION CONCEPT
Revenue means the addition to the capital as a result of business operations.
Revenue is realised on three basis-:
Basis of cash
Basis of sale
Basis of production
8) MATCHING CONCEPT
All the revenue of a particular period will be matched with the cost of that period for determining the net profits of that period.
Accordingly, for matching costs with revenue, first revenue should be recognised & then costs incurred for generating that revenue should be recognised.
Following points must be considered while matching costs with revenue-:
Outstanding expenses though not paid in cash are shown in the P&L a/c.
Prepaid expenses are not shown in the P&L a/c.
Closing stock should be carried over to the next period as opening stock.
Income receivable should be added in the revenue & income received in advance should be deducted from revenue.
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) OBJECTIVITY CONCEPT
Accounting transactions should be recorded in an objective manner, free from the personal bias of either management or the accountant who prepares the accounts. It is possible only when each transaction is supported by verifiable documents & vouchers such as cash memos, invoices.
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
This principle states that the cost incurred in applying the principles should be less than the profits derived from them.
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.
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.
Proforma & contents of balance sheet & P&L a/c are prescribed by Companies Act.
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.
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 certainity
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.
DIFFERENCE B/W CONCEPTS & CONVENTIONS Biasness in adoption No space for personal biasness in the adoption Biasness No uniform adoption Uniform adoption Uniformity Guidelines based upon customs or usage By law Established ACCOUNTING CONVENTIONS ACCOUNTING CONCEPTS BASIS