The document discusses key accounting concepts:
1) The accounting period concept covers the time period financial statements measure income and the relationship between balance sheets and income statements.
2) The accrual concept supports measuring income when efforts occur rather than when cash is received or paid.
3) The realization concept determines when revenue and expenses can be measured based on an exchange taking place and amounts being reasonably assured of collection.
Accounting concept refers to the
Basic assumptions
Rules
Principles
which work as the basis of recording of business transactions and preparing accounts.
Accounting concepts and conventions
In drawing up accounting statements, whether they are external "financial accounts" or internally-focused "management accounts", a clear objective has to be that the accounts fairly reflect the true "substance" of the business and the results of its operation.
The theory of accounting has, therefore, developed the concept of a "true and fair view". The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business' activities.
To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently.
Accounting Conventions
The most commonly encountered convention is the "historical cost convention". This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost.
Under the "historical cost convention", therefore, no account is taken of changing prices in the economy.
Accounting concept refers to the
Basic assumptions
Rules
Principles
which work as the basis of recording of business transactions and preparing accounts.
Accounting concepts and conventions
In drawing up accounting statements, whether they are external "financial accounts" or internally-focused "management accounts", a clear objective has to be that the accounts fairly reflect the true "substance" of the business and the results of its operation.
The theory of accounting has, therefore, developed the concept of a "true and fair view". The true and fair view is applied in ensuring and assessing whether accounts do indeed portray accurately the business' activities.
To support the application of the "true and fair view", accounting has adopted certain concepts and conventions which help to ensure that accounting information is presented accurately and consistently.
Accounting Conventions
The most commonly encountered convention is the "historical cost convention". This requires transactions to be recorded at the price ruling at the time, and for assets to be valued at their original cost.
Under the "historical cost convention", therefore, no account is taken of changing prices in the economy.
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Basic standard accounting assumptions
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What is Going Concern ?
The financial statements are normally prepared on the assumption that an enterprise will continue in operation in the foreseeable future and neither there is intention, nor there is need to materially curtail the scale of operations. Going concern assumption is not likely to be compatible with the intention or necessity to enter into a scheme of arrangement with the enterprise’s creditors or to liquidate in near future.
Financial statements prepared on going concern basis recognise among other things the need for sufficient retention of profit to replace assets consumed in operation and for making adequate provision for settlement of its liabilities. If any financial statement is prepared on a different basis, e.g. when assets of an enterprise are stated at net realisable values in its financial statements, the basis used should be disclosed.
What is Consistency ?
The principle of consistency refers to the practice of using same accounting policies for similar transactions in all accounting periods. The consistency improves comparability of financial statements through time. An accounting policy can be changed if the change is required (i) by a statute (ii) by an accounting standard (iii) for more appropriate presentation of financial statements.
What is Accrual basis of accounting ?
Under this basis of accounting, transactions are recognised as soon as they occur, whether or not cash or cash equivalent is actually received or paid. Accrual basis ensures better matching between revenue and cost and profit/loss obtained on this basis reflects activities of the enterprise during an accounting period, rather than cash flows generated by it.
While accrual basis is a more logical approach to profit determination than the cash basis of accounting, it exposes an enterprise to the risk of recognising an income before actual receipt. The accrual basis can therefore overstate the divisible profits and dividend decisions based on such overstated profit lead to erosion of capital. For this reason, accounting standards require that no revenue should be recognised unless the amount of consideration and actual realisation of the consideration is reasonably certain.
Cloud based <a>Online Accounting Software</a> for day to day needs of accountants and sme's, allows you to manage payroll, bookkeeping for free.
Learn More :- https://www.capium.com
Basic standard accounting assumptions
Read this for more :
What is Going Concern ?
The financial statements are normally prepared on the assumption that an enterprise will continue in operation in the foreseeable future and neither there is intention, nor there is need to materially curtail the scale of operations. Going concern assumption is not likely to be compatible with the intention or necessity to enter into a scheme of arrangement with the enterprise’s creditors or to liquidate in near future.
Financial statements prepared on going concern basis recognise among other things the need for sufficient retention of profit to replace assets consumed in operation and for making adequate provision for settlement of its liabilities. If any financial statement is prepared on a different basis, e.g. when assets of an enterprise are stated at net realisable values in its financial statements, the basis used should be disclosed.
What is Consistency ?
The principle of consistency refers to the practice of using same accounting policies for similar transactions in all accounting periods. The consistency improves comparability of financial statements through time. An accounting policy can be changed if the change is required (i) by a statute (ii) by an accounting standard (iii) for more appropriate presentation of financial statements.
What is Accrual basis of accounting ?
Under this basis of accounting, transactions are recognised as soon as they occur, whether or not cash or cash equivalent is actually received or paid. Accrual basis ensures better matching between revenue and cost and profit/loss obtained on this basis reflects activities of the enterprise during an accounting period, rather than cash flows generated by it.
While accrual basis is a more logical approach to profit determination than the cash basis of accounting, it exposes an enterprise to the risk of recognising an income before actual receipt. The accrual basis can therefore overstate the divisible profits and dividend decisions based on such overstated profit lead to erosion of capital. For this reason, accounting standards require that no revenue should be recognised unless the amount of consideration and actual realisation of the consideration is reasonably certain.
This PPT contains all the topics related to Financial Accounting.
This PPT is related to MBA course subject code KMBN103
Subject Name Financial Accounting and Analysis
Accoutning concepts, principles and conventionsgherryta
Here are provided some details of following concepts, principles and conventions of accounting:
1. Entity Concept
2. Money Measurement Concept
3. Periodicity Concept
4. Accrual Concept
5. Matching Concept
6. Going on Concern Concept
7. Cost Concept
8. Principle of Prudence
9. Realization Concept
10. Dual aspect Concept
11. Consistency
12. Materiality
Hope, basic of these concepts is easy to understand.
Thanking you
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1. Accounting Concepts
Accounting Period Concept: Covers the period for which the income has been measured. It is the
time between the preparation and presentation of two successive statements of financial position by
an organization. The income statement presents the changes in owners’ equity due to operations
and other events between one balance sheet and the next.
Accrual Concept: Supports the idea that income should be measured at the time major efforts or
accomplishments occur rather than when cash is received or paid.
Realization Concept: Determines whether a revenue or expense has occurred so that it can be
measured, recorded and reported in the financial reports. In general, revenue is recognized along
with the associated expenses when an exchange has taken place, the earnings process is complete,
the amount of income is determinable, and collection of amounts due is reasonably assured.
Matching Concept: Determines that the expenses associated with revenue are identified and
measured.
Money Measurement Concept: All data is expressed in a common monetary unit that can be
added, subtracted, multiplied and divided to produce financial statements and reports, which can
then be analyzed.
Business Entity Concept: Delineates the boundaries of the organization for which amounts are
kept and reports are made.
Going Concern Concept: It is assumed that an entity will continue to operate much as it has been
operating for an indefinitely long period of time.
Cost Concept: Assets are initially recorded by measuring the amount paid for them. As time
passes, asset measurements are not changed even if the current value of these assets is changing.
Conservation Concept: Revenues and gains are recognized slower and expenses and losses are
recognized quicker.
Consistency Concept: Once an entity has selected an accounting method for a kind of event or a
particular asset, that same method should be used for all future events of the same type and for that
asset. Comparability is enhanced from one period to the next.
Materiality Concept: Insignificant events need not be measured and recorded. Events judged to
be insignificant can be ignored or disregarded.