Accounting Concepts & Conventions

2. Accounting
Concepts
Business
Entity
Concept
Money
Measurement
Concept
Cost Concept
Dual Aspect
Concept
Objective
Evidence
Concept
ACCOUNTING CONCEPTS

3.  BUSINESS ENTITY CONCEPT:
This concept states that from accounting point of view,
business is always treated as separate entity apart from its owners,
creditors and others. This concept is applicable to all forms of
organization, i.e. sole-trader ship, partnership and company. The
proprietor of an enterprise is always considered to be distinct and
separate from the business he controls. He becomes a creditor for his
business unit for whatever he gives it as capital, and he is treated as a
debtor for whatever he draws out from the business.
 MONEY MEASUREMENT CONCEPT:
All business transactions will be recorded in terms of money,
i.e. rupees and paise in India. Only those transactions that are
capable of being expressed in terms of money are included in the
accounting records of the enterprise.

4. COST CONCEPT:
Cost concept states that all assets are recorded in the books of
accounts at their purchase price, which includes cost of acquisition
,transportation and installation and not at its market price. It means
that fixed assets like building, plant and machinery,furniture,etc are
recorded in the books of accounts at a price paid for them. This cost
is also known as historical cost.
DUAL ASPECT CONCEPT:
This is the basic concept of accounting, According to this
concept, every business transaction has a dual effect. With every
increase in the money owed to others, there must be an increase in
assets or loss. Thus at any time the accounting equation is:
ASSETS=LIABILITIES+ CAPITAL
(Or)
CAPITAL=ASSETS-LIABILITIES

5. OBJECTIVE EVIDENCE CONCEPT:
According to this concept all the transactions of the business
should be evidenced and supported by documents such as invoices,
receipts, cash memos,etc.These supporting documents form the
basis for making entries in the books of account and their
verification by auditors afterwards. As for the items like depreciation
and the provision for doubtful debts where no documentary
evidence is available, the policy statements made by management
are treated as the necessary evidence.

6. Accounting
Conventions
Consistency
Conservatism
Full Disclosure
Materiality
ACCOUNTING CONVENTIONS

7. CONSISTENCY
According to this principle, whatever accounting practices
are selected for a given category of transactions, they should be
followed on a horizontal basis from one accounting period to
another to achieve compatibility. According to this convention,
accounting practices should remain unchanged from one period
to another.
CONSERVATISM:
Conservatism means the tendency to maintain a state of
affairs without a sudden change. For example
•Valuation of stock is done at cost or market price, whichever is
less
•Valuation of investments is done at cost or market price,
whichever is less
•Depreciation is charged on fixed assets but appreciation is not
recorded.

8. MATERIALITY:
The concept of materiality is relative. What is material for a
small company may not be material for a big company like Tata
Electric Locomotive Company(TELCO)
Ex: The cost of items such as small tools may be material for a small
repair workshop, but the same figure may be immaterial for TELCO
ltd.Similarly A difference Rs 1,000/- in depreciation expense may be
regarded as immaterial but the difference of Rs 1,000/- in cash could
be termed as material
FULL DISCLOSURE:
Full disclosure principle states that all information
significant to the users of financial statements should be disclosed.
This can be done either in the financial statements or their foot-
notes.
Ex: An enterprise has taken a big loan a fortnight after the date on
which the balance sheet of the period just ended is to be prepared
and presented.