accounting concepts and conventions

1. ACCOUNTING CONCEPTS
AND CONVENTIONS
PRESENTED BY- MR. AKSHAY M. KASAMBE
[N.S.P.MCOLLEGE OF PHARMACY DARWHA]
Email id- akshaykasambe@gmail.com
Contact No- 8237956745, 9172432197

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INTRODUCTION
ACCOUNTING CONCEPTS
ACCOUNTING CONVENTIONS

3. There are certain set rules for preparing the financial statements.
Accounting principles, rules of conduct and action are described by various terms such as
concepts, conventions, assumption etc
These rules are usually called "General Accepted Accounting Principles' (GAAP) and have been
commonly accepted by the professional accounting world as general guidelines for preparing the
financial statements.
INTRODUCTION
Accounting is generally considered as the "language' of the business. It records business
transactions which have taken place during the accounting period and communicates the results
thereof in the form of Financial statements, such as, Profit and Loss Account and Balance- sheet etc.

4. ACCOUNTING CONCEPTS
Accounting concept means the necessary assumption or conditions upon which accounting is based. A list of
accounting concepts which are generally used is given below
1. Entity concept
2. Dual aspect concept
3. Going concern concept
4. Accounting period concept
5. Money measurement concept
6. Cost concept
7. Revenue realisation concept
8. Matching concept
9. Verifiable objective evidence concept
10. Accrual concept

5. 1. ENTITY CONCEPT
The concept is very helpful to
find out the financial position of
the business.
Similarly in partnership business,
the firm is quite separate from
the individual partners who are
its member.
Moreover, it is easy to determine the
earning capacity of the business.
For example, the owner's house, his
investments in securities, his personal
car, and personal income and
expenditure should be kept separate
from the accounts of his business entity.
According to this concept, business is
treated unit or entity apart from its
owners, creditors, managers and others.
Thus the concept of separate entity is
applicable to all forms of business
organization i.e. proprietorship, partnership
or a company
Similarly if the owner is doing
some other business, its records
are kept separate.
This means that the proprietor of
an enterprise is always
considered to be separate and
distinct from the business which
he controls. ENTITY
CONCEPT
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6. 2. Dual aspect CONCEPT
The main aim of doing business is to earn profit. The profit earned is added to the capital at the end of the
accounting period.
Capital is what remains to the owner when al outside liabilities are paid off from the available assets of the
business and can be computed by the following balance sheet equation-
Capital = Assets - Liabilities or Assets = Liabilities + Capital
The equation is the basis of accounting. The above equation can te elaborated further by replacing the terms
"Liabilities" and "Asscts" by various types of liabilities and assets.
Whenever any transaction takes place, it has to be recorded in two or more accounts to balance the equation. This
concept of recording transactions is called "double entry system". All business transaction are recorded on the
basis of this concept. No transaction is complete without dual aspect concept. In fact this concept is the
foundation on which whole of the book-keeping and accounting is based. The concept is of great help in
disclosing the true position of the business. It is also helpful in detecting errors in account.
Assets = Capital + Liabilities
eg. Building ,Land ,Machinery ,
Furniture ,Stock in trade ,
Debitors, Bank, Cash,Bills to be
received
eg. Proprietor's capital eg. Loan , Bank overdraft, Creditors,
Bills payable , Outstanding expense ,
Income in advance

7. 3. Going concern CONCEPT
According to this concept a business will have an indefinite life unless it is likely to be sold or liquidated in the
near future.
Most of the enterprises continue to operate profitably for indefinite periods and are regarded as going
concerns.
On the basis of this concept the outside parties enter into long term contracts with the enterprise by gIving
loans, purchase bonds or invest funds in long-term Securities.
The fixed assets are also recorded at the cost when it was acquired and carried in the balance sheet at actual
cost less depreciation charge.
The fixed assets, as at present are not shown at their market value due to continuity concept. .
Due to this concept working life of an asset is taken into consideration for the purpose of writing off
depreciation.
Accountant does not stop writing transactions in books of account even the condition of business deteriorate or
going down.
He remains helpful about the continuity of business.

8. 4. ACCOUNTING PERIOD CONCEPT
It is also known as "Periodicity Concept" or "Time Period Concept". According to this concept the economic life
or an enterprise is divided into arbitrary periods usually 12 months periods to report on its performance and
financial position to its users.
In reality, the net income of an enterprise can be measured by comparing the assets of the business existing at
the time of its commencement with those existing at the time of its liquidation.
Since the life of business is assumed to be indefinite, it is not feasible to measure the income according to the
above concept.
The proprietor, investors, creditors and others cannot wait for such a long time. They need to know the position
of business more frequently and at regular intervals, Twelve month period is normally adopted for this purpose.
According to the Companies Act and the Banking Company Act, accounts are to be prepared for a twelve-month
period.
The time period is called "Accounting Period". Either a calendar year (January, I to December, 31st) may be
accounting year or April, I to March, 31st of next year may be accounting year.
The concept is very helpful in comparison of financial position as well as of earning concept of one year to that
of another year. These comparisons help the management in planning and increasing the efficiency of business.
The proprietor and outsiders can drive various conclusions according to their needs

9. 5. MONEY MEASUREMENT CONCEPT
According to this concept all business transactions are required to be recorded in terms of money.
Those transactions that are not capable of being recorded in terms of money are not recorded in the
accounting books, because the monetary unit relevant, simple and understandable.
By expressing all assets and liabilities in terms of money, it is possible to include them during the
preparation of financial statements.
For example, if a business enterprise has a cash balance of Rs 10,000, a double storeyed building. 2
acres of land, 20 machines, 500 Kg of raw material, 15 working tables etc., it is not possible to account
for all these assets, in the absence of money measurement concept.
But if they are expressed in monetary terms ie. Rs 10,000 cash, Rs 15,00,000 of building, Rs
45,00,000 of land. Rs 3,50,000 of machine, Rs 50,000 of raw material, it is possible to add them and
use them for comparison or any other purpose.
This concept, however, has one major limitation. According to money measurement concept a
transaction is recorded at its money value on the date of occurrence but subsequent changes in the
money value are not taken into account.
For example, a building purchased for Rs 12,80,000 in 1955 and another purchased for the same
amount in 1985, are recorded at the same price, although the one purchased in 1955 may now be worth
ten times more than its value recorded in the account books. (e.g. rise in value due to rise in land
prices, cost of construction. raw material used etc.).

10. 6. COST CONCEPT
According to this concept all transactions are recorded at their monetary cost of
acquisition.
The majority of assets and liabilities are recorded in the account books at the price paid
to acquire the same.
However they are carried forward from year to year at acquisition cost, irrespective of
any subsequent increase or decrease in their cost.
For example, if a piece of land was purchased for Rs 6,40,000 its present market value
will not be taken into account at the time of preparation of final statements (the market
value of that piece of land may now be around, say, Rs 21,00,000 or so).
Another important feature of this concept is that it is not necessary show the assets year
after year for an indefinite period at the cost price.
 The assets recorded at cost price at the time of purchase are systematically reduced due
to depreciation, till their economic life is over i.e they have been fully depreciated and
sold as scrap.
The concept is applicable to fixed assets only and current assets are not affected by it.
The fixed assets are given in balance sheet, in accordance to their cost.
The market price is ignored acc

11. 7. Revenue realisation CONCEPT
It is also known as Revenue Recognition concept.
According to this concept revenue is measured by the amount charged for goods
sold or services rendered to customers.
The GAAP (generally accepted accounting principles) require tha revenue is
recognized in respect of the period during which the sale is deemed to have occurred.
Similarly revenue from services rendered is recognized when services have been
performed to the satisfaction of the customer and he has to pay for it.
 For example, a firm gets an order in the month of March to supply the goods, but
due to some reason the goods is supplied in the month of June.
The revenue will be realised only in the month of June, when the ale actually takes
place.
This concept is of some significance as it helps in stopping business firms from
recording those incomes or profits that may be obtained as a result of making sales at
some future date.
The sale can however take place only when the cost has been received or a legal
obligation to pay has been incurred by the consumer.

12. The following three bases are used for determining the period in which revenue is realised
SALES BASIS CASH BASIS PRODUCTION BASIS
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SALES BASIS
The revenue is recognised
or realised when a sale is
completed. The sale is
completed when assets,
such as, cash or a promise
to pay cash are transferred
from the buyer to the
seller in exchange for title
to goods or services.
CASH BASIS PRODUCTION BASIS
The revenue is realised
when amount from sales
is actually collected. This
basis is adopted when
there is some doubt about
the collection of the
amount in respect of sale
The cash basis is
generally used in those
cases where the sale is
made on instalment basis.
The revenue can also be
recognised oe the basis
of production. This basis
is adopted when the sale
hais Tails. For example,
in long-term
construction projects,
revenue is usually
recognised before the
completion of the projet.

13. 8. MATCHING CONCEPT
• This concept holds that expenses are recognised in the same period as
associated revenues.
•The expenses recognised are linked to revenues to revenue recognition
•The expenses may be matched with revenues whenever it is reasonable and
practicable to do so.
•This concept is very helpful for correct determination of profite. its income,
which is a measure of performance.
•This means that expense incurred in generating periodic revenues is deducted
from the revenues to ascertain the amount of periodic income.
•The expeneses not recognised when cash is paid, or when work is performed or
when the product is produced, but they are recognised when the service or
product actually makes contribution to revenue.
•All expenses that only generate revenue in the current accounting period are
recognised expenses associated with the current period.

14. According to
concept the
accounting
data must be
definite,
verifiable
and free
from
personal bias
This means that
all accounting
transactions
should be made
con the basis of
supporting
business
documents, such
as, invoices,
vouchers and
receipts, which
are verifiable by
the auditors at a
later stage.
Moreover the
users of financial
statements should
have the feeling
that the data is
based on
documental
evidence and is not
subject to the bias
of either the
management or
the Accountants
who have
prepared the
accounts
9. VERIFIABLE OBJECTIVE EVIDENCE CONCEPT

15. Moreover, the
earning capacity
of the business
during given
period can be
easily found out.
Similarly.
expenses which
become due but
not yet paid in
cash must be
recorded it the
books as
expenses for the
period when
they become
due.
The concept is
helpful in
recording cash
and credit
transactions. helps
in assessing the
financial position
of the business at
the close of the
year.
The accrual concept of
accounting states that
income is measured by
difference between
revenue and expenses
and not by increase or
decrease it cash.
Income increases the
owner's equity and
loss decreases it.
According to this
concept, the
revenues which
become due but
not received in
cash, must be
recorded in the
books when it
becomes due and
not that when it is
received in cash
10. ACCRUAL CONCEPT
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CONSISTENCY
The term 'convention is used to denote established customs traditional practices as a guide
to the preparation of accounting statements. The following conventions are commonly used
ACCOUNTING conventions
MATERIALITY
CONSERVATISM
DISCLOSURE

17. It is essential that there should be full disclosure of all important and necessary informations
along with detail while preparing the financial statements.
It is beneficial to all those persons who are interested in the business to know the conect position
of the business,
1. CONVENTION OF DISCLOSURE
The convention of disclosure implies t all material information's must be disclosed and the accounts
are prepared honestly.
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18. The unimportant items are either
left out or merged with other items.
According to this convention, an item is regarded as
material if there is a reason to believe that knowledge of
it would influence the decision of an informed investor.
2. CONVENTION OF MATERIALITY
The financial statements are expected to disclose all material
items, the knowledge of which might influence the decisions of
the users of financial statements.

19. CONVENTION OF
CONSISTENCY
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If the management of company wants to
draw important conclusion regarding its
working over a number of years, it is
essential that the same accounting methods
are followed from one accounting period to
the other.
Any change from one method to another
would result in inconsistency.
The comparison of the result of one
accounting period with those of another is
possible only if the convention of
consistency is strictly followed.
For example, if a company follows the
straight line method of depreciation in
the first year, it is expected to follow the
same method in future also in order to
maintain the convention of consistency.
3. CONVENTION OF CONSISTENCY

20. When there are two equally acceptable
methods, then the one which is more
conservative will be employed
When there is a possibility of the
occurrence of a loss or profit, losses
will be considered and profits will be
overlooked.
When there is uncertainty inherent in the
activity, eg uncertainty as to the useful life
of an asset, occurrence of loss, realisation
of income and remaining utility of an asset.
When judgment is based on the estimates and
doubt exists as to which of general estimates
is correct, the most conservative would be
selected.
4. CONVENTION OF CONSERVATISM
"Conservatism' means a guideline which chooses from acceptable accounting alternatives the one for recording
events or transactions which reports the least favourable immediate effect on assets, income and owners equity.
The convention of conservatism provides to "play safe". It takes into consideration all prospective losses but
leaves out all prospective profits. The convention of conservatism is applied in the following cases

21. THANK YOU
“Education is the passport to the
future, for tomorrow belongs to t
hose who prepare for it today.”
A.M.KASAMBE