Basics of accounting useful for D.Pharm and B.Pharm students

1. Accounting Concepts
and Conventions
By , Mr.Prashant M Giradkar
HOD
P.Wadhwani college of Pharmacy. Yavatmal. Maharashtra. India

2. Definition of Accountancy
• Accountancy is Language of communicating business transaction and Finance
information
• Accountancy is an art and science of recording business transaction
systematically and scientifically in the books of accounts so as to show true and
fair picture of business and to keep permanent record of business transactions
• It is the systematically gathering, analysis, classification, measurement and
recording of business transaction and finance information of the business

3. Book keeping
• Book keeping is limited up to systematic recording of business
transactions.
• Where as Accountancy includes Book keeping and calculation of end
result of business
• In other words Book keeping is first step of Accounting i.e. recording of
business transactions only

4. GAAP
• There are some necessary assumption upon which total accounting is
based they are called as Generally Accepted Accounting Principle (GAAP)
These principles are laid down as Accounting Concepts and Accounting
conventions

5. Accounting Concepts
These are necessary assumptions that should be followed by while recording business
transaction and preparing financial statements. They are termed as Accounting concepts
• Accounting period concept
• Separate entity concept
• Dual Aspect Concept
• Going concern concept
• Cost Concept
• Money Measurement concept
cont.

6. Accounting Concepts
• Verifiable objective evidence concept
• Accrual concept
• Revenue realization concept

7. Accounting Period concept
• According to this concept
• A business man will not wait to know the performance i.e. Profitability
and Financial position of business till the end of business or closure of
business therefore, a life period of Business is divided into an arbitrary
period say that one year, this one year is called as Accounting period or
Financial year. The last date of this period on which business man
prepares Financial statements .This date is called as Accounting date.
• This concept is also called as Periodicity concept

8. Separate entity concept
• According to this Business and Businessman these are two separate
entities
• Financial affairs of business and Businessman should not be mixed with
each other and true and fair picture of Business will not be available
• When Business man Brings something for business that should be
recorded in books of accounts of business
• And Businessman purchases anything for himself personally that should
be recorded in his books of account

9. Dual Aspect concept
• According to this concept every transaction has two fold effect
• If businessman Purchases anything for business, he will receive that thing
against cash .
• This means that when you get something you will loose something
• i.e. If you debit something then you will credit something
• Every debit has corresponding credit and Vice versa

10. Going concern concept
• According to this concept Business has indefinite life unless it is been
liquidated or sold in near feature.
• If business activity runs profitably
• Creditors will provide you finance
• Banks will provide long term loans
• Shareholders will continue their ownership of shares
• If Business is not going concerns these parties will not enter in long term contract

11. Cost concept
This concept gives the policy to play safe
• For the assets the market price decreases then current cost price
should be considered
• For ex. Plant , Machinery, Vehicles etc.
• For the assets the market price increases then acquisition cost
price should be considered
• For ex. Land, Gold, Shares

12. Money Measurement concept
According to this concept
All items to be recorded in the books of account should be converted and expressed
in terms of its Monetary value. The items which can not be expressed in terms of
money should not be recorded in the books of accounts.
For ex.
Instead of Land= 2 acres , it should recorded as Land =10 Lacs
Instead of Building= 2 Nos. , it should recorded as Building=20 Lacs

13. Verifiable objective Evidence concept
• According to this concept
• Accounting data must be Definite, firm and verifiable
• Recording of business transactions should be done on the basis of
verifiable evidences like Bills, Receipts ,Vouchers ,Challans, Cash memos
etc
• Which can verifiable at the latter stage of accountancy like Audits

14. Accrual concept
• According to this concept
• Assets and liabilities which are settled down in cash or kind is definitely recorded
in books of accounts in same financial year
• The liabilities are not settled in cash and they are required to be paid in same
financial year but not paid, then this should be recorded as accrued liability ,in
this way there will not be unnecessarily increase in assets and vice versa
• The assets and liabilities which are not settled in cash in same financial year and
probably be settled in next financial year are termed as Accrued assets and
Accrued liabilities (Interest of Loan is not paid in same financial year but it was
required to be paid)

15. Revenue Realization concept
• There are three basis for realization of revenue
• Production basis : When the required production of finished product is done one
can assume that revenue is being collected (When there risky production and
when sales basis and cash basis fails)
• Sales Basis :When sales is completed by cash or credit basis then one assumes
that the revenue is realized
• Cash Basis :When sales is done on cash basis then one assumes that revenue is
realized, this is considered when there is uncertainty in collection of revenue for
the sales done

16. Accounting conventions
• Accounting conventions means
• These are customs and traditions which must be followed while preparing
financial statements. i.e. Profit and loss accounts and Balance sheet
• The whole accounting world follows the these customs and traditions
• These are
• Convention of Full Disclosure
• Convention of Consistency
• Convention of conservatism
• Convention Of Materiality

17. Convention of Full disclosure
• According to this convention
• All financial statements should be prepared honestly
• All financial statements should be disclosed fully and firmly to the users of
financial statements as and when they required.
• Users of Financial statements are
• Management
• Shareholders
• Creditors
• Employees Unions

18. Convention of Consistency
• According to this convention
• Accounting practices should be same from year to year for calculation of Profit
and Losses and Assets and liabilities i.e. while preparing financial statements. A
straight line methods should be used while preparing financial statements
• For ex. While calculating depreciation, if 15% depreciation is used for last year
then same should be used for all years while calculating depreciation.
• In this way comparison of Financial statement of this year with previous years
and comparison of Financial statements with similar other firms is possible

19. Convention of Conservatism
• According to this convention
• When there are two or more equally acceptable methods, one which is more
conservative must used while preparing financial statements.
• It gives policy or caution to play safe
• When there is possibility of occurrence of losses and profits then losses must be
considered and Profits should overlooked
• For ex. Life of machinery predicted by its supplier is 5 yrs. But that machines may works
for 10 years, at this time life of machinery must be considered for 5 yrs only, i.e. Every
year 20% depreciation cost should be reduced so that cost of machine will be Zero at end
of fifth year

20. Convention of Materiality
• According to this convention
• Every item while preparing financial statement is regarded as Material
(important) item
• Financial statement should disclose every material item fully and firmly
• The item which may produce dilemma or confusion in mind informed
users that should be ignored if possible or it should be merged with some
others

21. Thank you