2. Accounting concepts
• Rules of accounting that should be followed in
preparation of all accounts and financial
statements are known as accounting concepts.
• Now the concept of Debits and Credits is
actually more than 500 years old, being used
extensively by the Venetian merchants of Italy
in the 15th century Renaissance period. The
concepts were first documented in Latin in the
1400’s and were later translated into English
in the 16th century.
3. Basic rules :
Debit the receiver
Credit the giver
Debit the assets
Credit all liabilities
Debit what comes in ,
Credit what goes out
4. The four fundamental concepts:
• (1) Accruals concept: revenue and expenses are
recorded when they occur and not when the cash is
received or paid out;
(2) Consistency concept: once an accounting
method has been chosen, that method should be
used unless there is a sound reason to do
otherwise;
(3) Going concern: the business entity for which
accounts are being prepared is in good condition
and will continue to be in business in the
foreseeable future;
5. • (4) Prudence concept (also conservation
concept): revenue and profits are included in
the balance sheet only when they are realized
(or there is reasonable 'certainty' of realizing
them) but liabilities are included when there is
reasonable 'possibility' of incurring them.
6. Accounting conventions
• Guidelines that arise from the practical
application of accounting principles. An
accounting convention is not a legally-binding
practice; rather, it is a generally-accepted
convention based on customs, and is designed
to help accountants overcome practical
problems that arise out of the preparation of
financial statements. As customs change, so to
will accounting conventions.
8. Convention of disclosure
• The disclosure of all significant information is
one of the important accounting conventions.
It implies that accounts should be prepared in
such a way that all material information is
clearly disclosed to the reader.
• The idea behind this convention is that any
body who want to study the financial
statements should not be mislead. He should
be able to make a free judgment. The
disclosures can be in the way of foot notes.
9. Convention of materiality
• According to this convention only those events or
items should be recorded which have a significant
bearing and insignificant things should be ignored.
• There is no formula in making a distinction between
material and immaterial events. It is a matter of
judgment and it is left to the accountant for taking a
decision. It should be noted that an item material for
one concern may be immaterial for another. Similarly,
an item material in one year may not be material in the
next year.
10. Convention of consistency
• This convention means that accounting
practices should remain uncharged from one
period to another. For example, if stock is
valued at cost or market price whichever is
less; this principle should be followed year
after year. Similarly, if depreciation is charged
on fixed assets according to diminishing
balance method, it should be done year after
year. This is necessary for the purpose of
comparison.
11. Convention of conservatism
• This convention ensures that uncertainties
and risks inherent in business transactions
should be given a proper consideration. If
there is a possibility of loss, it should be taken
into account at the earliest. On the other
hand, a prospect of profit should be ignored
up to the time it does not materialise. On
account of this reason, the accountants follow
the rule 'anticipate no profit but provide for all
possible losses'
12. Accounting principles
• There are general rules and concepts that govern
the field of accounting. These general rules-
referred to as basic accounting principles and
guidelines—form the groundwork on which more
detailed, complicated, and legalistic accounting
rules are based. For example, the Financial
Accounting Standards Board (FASB) uses the
basic accounting principles and guidelines as a
basis for their own detailed and comprehensive
set of accounting rules and standards.
13. GAAP
THE BASIC ACCOUNTING
PRINCIPLES AND
GUIDELINES
the detailed rules and
standards issued by FASB
and its predecessor the
Accounting Principles Board
(APB),
the generally accepted
industry practices.
14. • Since accounting principles differ across the
world, investors should be aware of these
differences and account for them when
comparing companies in different countries.
The problem of differences in accounting
principles does not much affect mature
markets. Still, investors should be careful,
since there is still leeway for the distortion of
numbers under many sets of accounting
principles
15. EXAMPLES
• Generally accepted accounting principles (USA)
• Generally accepted accounting principles (United
Kingdom)
• Generally accepted accounting principles (Plan
Comptable Général) (France)
• Generally accepted accounting principles (RAP) (Russia)
• Chinese Accounting Standards (Zhōngguó qǐyè kuàijì
zhǔnzé 中国企业会计准则) (China)
• International Financial Reporting Standards
(international)
16. Accounting policies
• The specific policies and procedures used by a
company to prepare its financial statements.
These include any methods, measurement
systems and procedures for presenting
disclosures. Accounting policies differ from
accounting principles in that the principles are
the rules and the policies are a company's way
of adhering to the rules.
17. • Accounting principles are lenient at times, so the
policies of a company can be very important.
Looking into a specific company's accounting
policies can signal whether management is
conservative or aggressive when reporting
earnings. This should be taken into account by
investors when reviewing earnings reports. Also,
outside accountants that are hired to review a
company's financial statements should check the
company's policies to ensure they conform to
accounting principles.
18. Difference in policies of India and USA
• Depreciation: Under the Indian GAAP, depreciation is
provided based on rates prescribed by the Companies
Act, 1956. Higher depreciation provision based on
estimated useful life of the assets is permitted, but
must be disclosed in Notes to Accounts.( Guidance
note no 49) . Depreciation cannot be provided at a rate
lower than prescribed in any circumstance. Contrary to
this, under the US GAAP , depreciation has to be
provided over the estimated useful life of the asset,
thus making the Accounting more realistic and
providing sufficient funds for replacement when the
asset becomes obsolete and fully worn out.
