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COURSE CODE:: MP102
AND FINANCE FOR
Unit -2:: ACCOUNTING CONCEPTS, PRINCIPLES
Discuss various accounting concepts
Define accounting principles
Describe the concept of accounting standards
Explain the process of setting standard
Discuss the significance of accounting standards
The financial statements are used by a number of users, both
within and outside an organization, such as owners, investors, and
government. As the types of users are diverse, it becomes necessary
to formulate the accounting concepts and principles to maintain
uniformity in the financial statement. This helps in making the
accounting information meaningful, reliable, and comparable for the
users. GAAPs are the set of rules and procedures of accounting that
are widely accepted. It constitute basic rules that define the
parameters and constraints within which accounting operates.
Accounting concepts are general rules or assumptions made while
preparing the financial statements. These concepts help the internal
and external users to understand and interpret the accounting
Business Entity Concept: According to this concept business is
treated as a separate unit or entity which is distinct from its owners,
creditors, managers and other stakeholders.
Dual Aspect Concept: According to this concept every transaction
has a two-fold effect namely receiving and giving.
Going Concern Concept: Is based upon the assumption that an
organization would not be ceased or liquidated in the immediate
future and continues to operate for an indefinite period.
Accounting Period Concept: Assumes that the entire
business tenure should be divided into equal
segments to study and analyze the results properly,
and at the end of each accounting period various
Money Measurement Concept: Underlines the fact
that only those transactions and events would be
recorded in the books of accounting that are financial
Cost Concept: Ensures that the assets are measured
as per the price paid (cost incurred) to acquire them,
which includes- cost of acquisition, transportation and
Verifiable Objective Evidence Concept: States that the
recording of business transactions should be done in an
objective manner and should be free from biases.
Realization Concept: Assumes that an organization should
determine the time when the revenues are earned or
expenses are incurred.
Accrual Concept: According to this revenues or expenses are
recorded when they are earned or incurred, and not when
cash is paid or received by an organization.ax
Disclosure Concept: Involves that accounts must be prepared
honestly and all the facts associated must be fully disclosed.
Materiality Concept: Emphasizes the inclusion of only
the important details with the material and ignoring the
insignificant details, which are not required for
Consistency Concept: Accounting practices and
methods remain unchanged from one accounting
period to another.
Conservatism Concept: According to this recording
the financial transactions in the books of accounting
by taking into consideration all prospective losses and
ignoring all prospective profits.
According to the American Institute of Certified
Public Accountants (AICPA):
“Principles of Accounting are the general law or rule adopted or
proposed as a guide to action, a settled ground or basis of
conduct or practice.”
Features of Accounting Principles:
Flexible: Implies that the accounting principles are not rigid;
they can change as per the requirement of business
Generally accepted: It implies that a standard framework
should be used for recording, summarizing, and reporting the
GAAP is a generally accepted codification of
preparing and presenting the business incomes,
expenses, assets, and liabilities of the
organization, through various financial statements.
According to the AICPA,
“Generally accepted accounting principles incorporate the
consensus at any time as to which economic resources and
obligations should be recorded as assets and liabilities, which
changes in them should be recorded, how the recorded assets
and liabilities and changes in them should be measured, what
information should be disclosed and which financial statements
should be prepared”.
Simple guidelines: Implies that the accounting principles are simple and
man-made guidelines, derived from past experiences.
Ensure uniformity: Implies that the accounting principles are set for
ensuring uniformity and meaningful presentation of the accounting
information, which can be understood by the users.
Relevance: Depicts that the accounting principles are relevant to the extent
that the accounting information presented after following these principles is
meaningful and useful for the users.
Objectivity: Implies that the accounting principles are not influenced by the
personal bias or judgment of those who have formulated them.
Feasibility: Refers to the extent to which the accounting principles can be
implemented without complexity and incurring any cost.
Accounting Standards can be defined as the written
statements issued regularly by accounting institutions.
These standards are used to hard code the accounting
principles that have been generally accepted widely.
These are the set of guidelines used to prepare and present
the financial statements, which help in bringing consistency in
the reporting of accounting information.
Accounting Standards can be defined as the written
statements issued regularly by accounting institutions, which
are used to hard code the accounting principles that have
been generally accepted widely.
Provide a framework to produce reliable and standardized financial
Promote proper and timely dissemination of the financial information
to the management, investors and other interested users and create
a sense of confidence among them.
Ensure transparency, consistency, and comparability of accounting
Take into consideration the business environment and laws of a
Applicable to all types of businesses irrespective of their industry
Provide flexibility by facilitating an organization to freely adopt any
of the practices with a suitable disclosure.
Improving credibility and reliability of financial
Accounting standards determine the regulations
and corporate accountability, which helps to
assess the managerial skills in maintaining and
improving the profitability, liquidity and solvency.
Accounting professionals get guidance through
these accounting standards, which help them to
prepare and audit the financial statements
PROCESS OF SETTING
Procedure adopted by ASB involves:
Determining the board for issuing accounting standards and
listing them according to priority.
Seeking assistance of various study groups to formulate
standards. These groups prepare the preliminary drafts of
accounting standards according to the topics assigned to
Issuing the draft of the standards, as an Exposure Draft for
inviting comments by the members of institutes and public at
large, after considering the views of associations.
Considering the comments on the exposure draft, and then
preparing a final draft to be submitted to the council of the