Accounting Principles and conventions

1. Prof. Anusha N Bhat

2.  Accounting is an art of recording business transactions
to find the profit or loss.
 In order to maintain the books of accounts, a person has
to know the common accounting principles used by the majority of business
people.
 In the absence of these principles, each one will have his own idea or
procedure to maintain the books of accounts.
 Hence some common principles need to be followed in
any kind of business.

3. GAAP
 Generally Accepted Accounting Principles (GAAP or US GAAP) are a collection of
commonly-followed accounting rules and standards for financial reporting.
 It refers to those rules of action or conduct which are derived from experience and
practice and when proven useful, they become accepted as principles.

4. Criteria for acceptance of Principles
 Relevance- meaningful results, useful information
 Objectivity- not influenced by personal judgement or bias, deals with
reliability or trust worthiness
 Feasibility-implemented with ease-without
undue complexity or cost

6. Accounting Concepts
Business entity
Concept
Money
measurement
concept
Dual aspect
concept
Going concern
Concept
Accounting
period Concept
Legal Aspect
Concept
Accrual
Concept
Cost
Concept
Realisation
Concept
Matching
Concept

7. Business Entity Concept
 Business Entity Concept-
-Business unit is separate and distinct from the owners
-To record the transactions separately
-To avoid the business transaction mixed up with personal affairs of the owner.

8. Money measurement concept
-Under this only those transactions in terms of money are recorded
- Non-monetary transactions like efficiency, honesty cannot be recorded

9. Dual Aspect Concept
Involves two aspects:
- Receiving aspect
- Giving aspect
>> There must be a double entry to have a complete record of each transaction

10. Going Concern Concept
>> Continuous existence of the business concern.
>> The life of the business does not come to an end within a year
>> Carried on for a number of years in future.
>> Goods are sold and purchased on credit on the basis of this concept only.

11. Accounting Period Concept
 Also known as definite accounting period
 Life of business is divided into suitable accounting period
 To ascertain the profit or loss and know the financial position
 01-04 to 31-03

12. Matching Concept
 Expenses incurred should match with revenue recognised
Appropriate costs should be matched with appropriate revenue

13. Realisation Concept
o Business must record revenue or income after it has been legitimately realised.
o It can include legal obligation to be paid (debtors)- [agreeing to pay in future]

14. Cost Concept
Asset is recorded in the books at the price paid to acquire it
This cost is the basis for all subsequent accounting for that asset
Assets not recorded at their realisable value because these value keeps on
changing with price level from time to time.

15. Accrual Concept
 Financial position and profitability of a concern are assessed at a regular
interval.
 All the revenue and expenses are considered irrespective of the fact whether
these items are paid or payable.

16. Legal Aspect Concept
 The record should reflect the legal validity of the transaction entered in the
books, if it is not possible, appropriate qualifying note should be made.
 A firm cant tell anyone and everyone as a debtor until and unless he actually
owes money to the company.

17. Accounting Conventions

18. Convention of Materiality
 It tells that only important items should be recorded in the accounting
statements to avoid confusing the reader.
 Example- the stationery like pens, pencils, stapler, punching machine etc…
costing Rs 500 may last for 3 years, still they cant be treated as assets, instead
it said to be an expenses.

19. Convention of Conservatism
 Also known as Prudence- anticipate no profit, provide for all possible losses.
 Record lowest possible value for assets and revenues and highest possible value for
liabilities and expenses.
 Example:
a) Making provision for doubtful debts
b) Valuing stock at market price or cost price whichever is less

20. Convention of Consistency
 Accounting rules, practices and conventions should be continuously observed
and applied- should not change from one year to another
 The results can be compared only if accounting rules are continuously
observed from year to year- if a change is required it should be stated clerly.

21. Convention of Full Disclosure
 Financial Statement should act as a means of conveying and not concealing.
 It must disclose all the relevant and reliable information, so that the
information may be useful to the users.
 Disclosure-full, fair and adequate- make correct assessment about the
performance and position of the enterprise.