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Program :
Faculty :
Course :
Trimester :
Session/s :
Week :
4
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PGDM - 01
Prof.Dr.P.R.Ramakrishnan
Introduction toFinancialAccounting
I

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•Learningobjectives
1.To have a clear understanding about Accounting
Concepts ,Meaning, Types
2.To comprehend Accounting Conventions Meaning…
Types
3.Difference between Accounting Concepts
&Conventions

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Concepts
ACCOUNTING CONCEPTS -:
In order to make the accounting language convey
the same meaning to all people & to make it more
meaningful, most of the accountants have agreed on
a number of concepts which are usually followed for
preparing the financial statements. These concepts
provide a foundation for accounting process. No
enterprise can prepare its financial statements
without considering these concepts.

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1) BUSINESS ENTITY CONCEPT
• Business is treated as separate & distinct
from its members
• Separate set of books are prepared.
• Proprietor is treated as creditor of the
business.
• For other business of proprietor different
books are prepared.

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2) MONEY MEASUREMENT CONCEPT
• Transactions of monetary nature are
recorded.
• Transactions of qualitative nature, even
though of great importance to business are
not considered.

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3) GOING CONCERN CONCEPT
• Business will continue for a long period.
• As per this concept, fixed assets are
recorded at their original cost &
depreciation is charged on these assets.
• Because of this concept, outside parties
enter into long term contracts with the
enterprise.

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4) ACCOUNTING PERIOD CONCEPT
• Entire life of the firm is divided into time
intervals for ascertaining the
profits/losses are known as accounting
periods.
• Accounting period is of two types-
financial year(1st Apr to 31st March) &
calendar year(1st Jan to 31st Dec).

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• For taxation purposes financial year is
adopted as prescribed by the Govt.
• Companies having their shares listed on
stock exchange publishes their quarterly
results.

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5) HISTORICAL COST CONCEPT
• Assets are recorded at their original price.
• This cost serves the basis for further
accounting treatment of the asset.
• Acquisition cost relates to the past i.e. it is
known as historical cost.

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JUSTIFICATION for HISTORICAL COST
CONCEPT
• This cost is objectively verifiable.
• Justified by going concern concept.
• Current values are difficult to determine.
• Difficult to keep track of up down of the
market price.

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DRAWBACKS OF HISTORICAL CONCEPT
• Assets for which nothing is paid will not be
recorded like reputation, brand value, etc.
• Information based on historical cost may
not be useful to its members.

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6) DUAL ASPECT CONCEPT
• Every transaction recorded in books
affects at least two accounts.
• If one is debited then the other one is
credited with same amount.
• This system of recording is known as
“DOUBLE ENTRY SYSTEM”.
• ASSETS = LIABILITIES + CAPITAL

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7) REVENUE RECOGNITION/REALISATION
CONCEPT
• Revenue means the addition to the
capital as a result of business
operations.
• Revenue is realised on three basis-:
1. Basis of cash
2. Basis of sale
3. Basis of production

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8) MATCHING CONCEPT
• All the revenue of a particular period will be
matched with the cost of that period for
determining the net profits of that period.
• Accordingly, for matching costs with
revenue, first revenue should be recognised
& then costs incurred for generating that
revenue should be recognised.

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Following points must be considered while
matching costs with revenue-:
1. Outstanding expenses though not paid in cash
are shown in the P&L a/c.
2. Prepaid expenses are not shown in the P&L a/c.
3. Closing stock should be carried over to the next
period as opening stock.
4. Income receivable should be added in the
revenue & income received in advance should
be deducted from revenue.

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9) ACCRUAL CONCEPT
In this concept revenue is recorded when
sales are made or services are rendered &
it is immaterial whether cash is received or
not.
Same with the expenses i.e. they are
recorded in the accounting period in which
they assist in earning the revenues whether
the cash is paid for them or not.

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10) OBJECTIVITY CONCEPT
Accounting transactions should be recorded
in an objective manner, free from the
personal bias of either management or the
accountant who prepares the accounts. It is
possible only when each transaction is
supported by verifiable documents &
vouchers such as cash memos, invoices.

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11) TIMELINESS
• This principle states that the information
should be provided to the users at right time
for the purpose of decision making.
• Delay in providing accounts serves no
usefulness for the users for decision
making.

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12) COST BENEFIT PRINCIPLE
• This principle states that the cost incurred in
applying the principles should be less than
the profits derived from them.

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ACCOUNTING CONVENTIONS
An accounting convention may be defined as
a custom or generally accepted practice
which is adopted either by general
agreement or common consent among
accountants.

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1) CONVENTION OF FULL DICLOSURE
• Information relating to the economic affairs
of the enterprise should be completely
disclosed which are of material interest to
the users.
• Proforma & contents of balance sheet &
P&L a/c are prescribed by Companies Act.
• It does not mean that leaking out the
secrets of the business.

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2) CONVENTION OF CONSISTENCY
• Accounting method should remain
consistent year by year.
• This facilitates comparison in both
directions i.e. intra firm & inter firm.
• This does not mean that a firm cannot
change the accounting methods according
to the changed circumstances of the
business.

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3) CONVENTION OF CONSERVATISM
• All anticipated losses should be recorded
but all anticipated gains should be ignored.
• It is a policy of playing safe.
• Provisions is made for all losses even
though the amount cannot be determined
with certainity

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4) CONVENTION OF MATERIALITY
• According to American Accounting
Association, “An item should be regarded as
material if there is reason to believe that
knowledge of it would influence decision of
informed investor.”
• It is an exception to the convention of full
disclosure.
• Items having an insignificant effect to the user
need not to be disclosed.

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DIFFERENCE B/W CONCEPTS &
CONVENTIONS
BASIS ACCOUNTING
CONCEPTS
ACCOUNTING
CONVENTIONS
Established By law Guidelines based upon
customs or usage
Biasness No space for personal
biasness in the
adoption
Biasness in adoption
Uniformity Uniform adoption No uniform adoption

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Learningoutcome
we have understood the various concepts of accounting
and their implications in detail
we have also understood about the conventions which
are fundamentals in accounting rules
have learnt about conventions and concepts differentials

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THANK YOU