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Basic concepts and principles.pptx
1.
2. • The rules applied by accountant for preparing accounts and financial statements are
known as accounting principles.
• In other word: “ Accounting principles means generally accepted rules providing
guidance for accounting and act as a basis for transactions which change along with
changes in time.”
3. Characteristics of accounting principles
• Accounting principles have been developing at a faster rate.
• Accounting principles have been developed on basis of assumptions, concepts,
conventions.
• Accounting principles developed have framed and developed by men.
• Government does not make accounting principles but pay attention at the time of
preparing laws or acts.
• Accounting principles gets acceptance widely of accounts
• Accounting principles are simple and easy to use
• Accounting principles are based on actual facts
4. • Accounting Principles usually adopted by all the countries but uniformly is not necessary.
However the objects are similar.
• Accounting Principles are encouraged by professional institution
5. Nature of Accounting
There was a committee formed in 1935 by Henry Rand Halfield, Moor and Thomas. They
study and show the nature of accounting principles. This committee gathered true and
correct information and knowledge of current thoughts after having interviews with
accounts, experts and heads of various committees. They studied various accounting
literature, reports of auditors, decision’s rules, regulations, laws etc. and concluded the
following nature of accounting principles:
• The nature of accounting principles is flexible.
• The man himself has formed the accounting principles. Hence, its accuracy can not be
tested in laboratory like other natural science.
• Accounting principles are affected by professional institutions and government
6. Criteria of Accounting Principles
The rules of accounting may get wide recognition only when they are proved correct in
accounting principles. These criteria are a sunder:
• Objectivity: the principles of accounting must be related with the objectivity. They
should NOT be affected by personal opinion and partial decision of an accountant. Such
as property should shown at cost price is objectivity, because it’s the price which is paid
and there will be no conflict in it. As against it, if the property is shown at market price, it
will noy be objectivity because there are chances of controversy in determining assets at
market price.
• Usefulness or relevance: the principles of accounting should be in accordance with the
need of relevance and wishes of proprietor, management, investors, creditors etc.
7. Significance of accounting principles
Accounting principles are not complete, true and static as the principles of physics,
chemistry, science, even they have their importance which are mentioned below:
• Similarity in accounts
• Control of accounts
• knowledge of actual situation
• Acts as a guide
• Regular information of progress
• important but not compulsory
9. Balance sheet principles
Balance sheet presents the true and fair picture of economic status of an organization. The
main principles relating to it are as under:
• Subject matter principles: divided into two parts: assets and liabilities. Balance sheet
prepared at a particular date and explained the status of a definite period. And it
included the matter related to: capital employed, profit, surplus, reserves, long term
and short term liabilities, prepaid accrued income, current assets, current liabilities,
fictitious assets, fixed assets etc.
• Principles of fixed assets: assets having long period in business are known as fixed assets.
They are two types: tangible and intangible.
1. Fixed assets are shown at cost price in first year and thereafter at depreciated value
and the amount of depreciation should be deducted.
2. Fixed Assets are not to be shown on present price or market price.
3. Tangible assets and intangible assets are not be shown separately.
4. Intangible assets should be written off as early a possible
10. •
Note: Intangible assets, like copyrights, trademarks, and trade secrets, have
value to a business even though they don't have a physical form. Businesses
can deduct the cost of these assets as expenses over several years using a
process called amortization.
11. • Principle of investments:
1. Investment in govt securities in company and the other investments are to be shown
separately.
2. Investment should be valued keeping in view its cost and market price.
3. The method of valuation of each investment ( cost or market price) should be shown
separately.
• Principles of current assets
1. The valuation of current assets is done by keeping in mind its cost price, market price
and current price.
2. The method of valuation of stock should be clear.
3. Reserves, funds, provisions of current assets should be recorded along with the current
assets.
12. • Principle of loan: loan taken from different parties shown separately; any security,
guarantee given on such loan should be shown as an information; any interest on loan
shown separately.
• Principle of current liability: current liability should be shown separately in the balance
sheet at actual or book value, BP creditor outstanding interest on loan advance income
etc. are some current liabilities.
• Principle of contingent liabilities:
1. Enough arrangements of funds be made for the payment of liabilities.
2. Liabilities are important
3. These liabilities are expected to be in near future
4. They are to be shown as footnote in balance sheet.
13. • Principles of capital balance: the principle of capital balance will not to be used as
revenue
The following points are considered in this regards:
1. The capital of the sole proprietor should be shown in the balance sheet after adding
profit of the year and deducting drawings and loss if any.
2. The capital of a partners of a partnership should be shown separately in the balance
sheet
3. In case of balance sheet , authorized capital issued capital and profit and loss should be
shown separately.
14. Income statement principles
Income statement is prepared to calculate income of a certain period. The main principles
are as under:
• Fixed period principle: according to the principle every organization during a particular
period should prepare income statement or profit and loss account.
• Principle of income priority: the main revenue and other revenue of business should be
shown separately.
• Principles of accounting of cost and expenses: the following items are included in cost
and expenses: operating cost; loss of stock in the period; depreciation amount;
arrangement of loss on doubtful debt and other current assets.
• Principle of calculation of net income: income statement should be prepared in such a
manner that no adjustment should be left after calculating the profit. If small adjustment
Is there than should be done from current income and large adjustment should be done
from the surplus of accrued income.
15. General principles
Principles related to solve the general problem of business is known as general principles.
• Principle of clarity
• Principle of fluctuation of capital and income transactions
• Principle of information regarding financial aspect
• Principle of reliable historical accounts
• Principle of equality of items in time period
• Principles of total awareness
• Principles of expressing transaction in monitory form
16.
17. Accounting concepts and postulates
• Concept includes all those conditions and assumptions on which accounting science is
based. Also know as, postulates, concepts, axioms etc.
• Oxford advanced learners dictionary: Concept means those natural ideas upon which
the whole accounting structure is based.
• Hence, it can be said that accounting concepts means those logical arguments used in
accounting for systematic recording of various transactions on the basis of which various
ideas are propounded.
18. 1. Entity concepts: the financial accounting information is not related with the activities
of the proprietor but they are related with the activities of business. For accounting
purpose business itself is a separate unit. The object of accounting is to evaluate the
profit and loss of a business it is possible only when the entity is different form the
owner and accounting of personal business are kept separately.
In accounting concepts the following two elements are included:
A . Limited area: it limits the scope of documentation and reports such as money drawn for
personal use in sole proprietorship business is to be shown as drawings and not as trading
expenses.
B. Accounting as enterprise level: every transaction is to be recorded at enterprise level
not from any party.
19. 2. Money measurement concept: all transactions are measure in terms of money. Only
those transactions are recorded which can be measured in money. The major problem in
this concept is that, the fluctuations in the purchasing power of money has no effect on
accounting. For example: if In 2010 the price of any asset is 50000 and in 2015 it is 200000.
and if this asset is purchase again than the accounting of this asset in different will be on
different amount.
3. Going concern or continuity concept: all the transactions in accounting are recorded on
the basis of this assumption that the trade will remain continue for unlimited period. It is
assumed that trade will continue for a long period.
4. Cost concept: all assets are to be valued at cost price or on purchase price. At the time
of accounting no attention is paid on their current or replacement price. Depreciation on
fixed assets charged on purchase or cost price. But it is criticised on the basis of that the
historical cost does not show the true price.
20. 5. Matching concept: the main aim of accounting is to obtain net results. Acc. To this
concept in a certain period, matching of income earned and its expenditure made to
obtained the net results. But its very difficult to obtain. Like income received in a certain
period of time is difficult to match with the rent of office building and other exp.
6. Periodicity concept: the life of trade is always uncertain. Hence it important that in
order to determine the trading results, the life time of trade should be divided into short
term periods. Generally the accounting period is of one year.(April 1 to March 31)
7. Dual aspect concept: there are two parties in every business transitions and they have
reverse impact on each party, having debit and credit side.
8. Concept of verifiable objective evidence: acc. To this principle, the honesty of every fact
should be made by outside valuers. Outside valuation means all those documents on
which accounting work is based is verified by outsider.
21. Accounting conventions
• Conventions in accounting have been evolved and developed to bring
about uniformity in the maintenance of accounts. Conventions denote
customs or traditions or usages which are in use since long.
• To be clear, these are nothing but unwritten laws. The accountants have to
adopt the usage or customs, which are used as a guide in the preparation of
accounting reports and statements.
• These conventions are also known as doctrine.
22. Following are the important accounting conventions in
use:
Convention of Disclosure:
• This convention requires that accounting statements should be honestly prepared
and all significant information should be disclosed therein. That is, while making
accountancy records, care should be taken to disclose all material information. Here the
emphasis is only on material information and not on immaterial information.
• The purpose of this convention is to communicate all material and relevant facts
of financial position and the results of operations, which have material
interests to proprietor, creditors and investors.
23. • Sometimes, there may be time gap between the preparation of Balance Sheet and
its publication and if there are material events — bad debts, destruction of plant
or machinery etc., which occurred in the time gap, may also be known to users
proprietors, creditors etc. In short, full disclosure of all relevant facts in accounts
is a necessity in order to make accounting record useful. Therefore, full
disclosure is a very healthy convention, and is important.
24. Convention of Consistency:
• Rules and practices of accounting should be continuously observed and applied. In order
to enable the management to draw conclusions about the operation of a company
over a number of years, it is essential that the practices and methods of accounting
remain unchanged from one period to another. Comparisons are possible only if a
consistent policy of accounting is followed.
• If there are frequent changes in the treatment of accounts there is little or no scope
for reliability. Comparison of accounting period with that in the past is possible only
when the convention of consistency is adhered to.
• According to Anthony, “the consistency requires that once a company had decided on one
method, it will treat all subsequent events of the same character in the same fashion unless
it has a sound “reason to do otherwise.”
25. • This convention plays its role particularly when alternative accounting practice is
equally acceptable. Moreover, consistency serves to eliminate personal bias. But if
a change becomes desirable, the change and its effect should be clearly stated in
the financial statements. Accounts should lend themselves easily to comparisons
and contrasts.
• This convention increases accuracy and comparability of accounting
information for prediction or decision making. This convention does not
prohibit changes. If there is any change, its effect should be clearly stated in the
financial statements.
26. Convention of Conservatism:
• “Anticipate no profit and provide for all possible losses” is the essence of this
convention. Future is uncertain. Fluctuations and uncertainties are not
uncommon. Conservatism refers to the policy of choosing the procedure that
leads to understatement as against overstatement of resources and income.
• The consequences of an error of understatement are likely to be less serious than
that of an error of overstatement. For example, closing stock is valued at cost or
market price whichever is lower. This is a convention of caution or playing safe
and is adhered to while preparing financial statements. Showing a position better
than what it is, is not permitted. Moreover, it is not proper to show a position
substantially worse than what it is.
27. • Following are the examples:
• (a) The value of an asset should not be overestimated.
• (b) The value of a liability should not be underestimated.
• (c) The profit should not be overestimated.
• (d) The loss should not be underestimated.
Such conservatism is generally accepted to present a true and fair value of business
in the financial statements.
28. • Accounting period convention:
Its necessary to have a fixed period of accounting for determining the trading results and
financial status. It has decided by keeping the life of the trade. The period of accounting is
one year, it can be less than one year also.
• Accounting equation convention:
Under double entry system every debit amount has the similar credit amount. Based on
this rule of American accountants framed the following rules of debit and credit with the
help of accounting equations:
29. 1. Rules regarding assets: increase asset is debited and decrease in assets is credited.
2. Rules regarding liabilities: increase in liability is Cr. And decrease in liability is Dr.
3. Rules regarding capital: increase in capital is Cr. And decrease in capital Is Dr.
4. Rules regarding income or profit: Increase in income or profit is Cr. And decrease in
income is Dr.
5. Rules regarding expenses or losses: increase in expenses or loss is debited and
decrease in expenses or loss is Cr.
30. Convention of Materiality:
Only important and useful events and facts should be shown in accounting whereas
useless and unimportant events should be avoided.
For example transactions made in the nearest Rupee.
Convention of observance of law:
It is important for the ACCOUNTANT AT THE TIME OF PREPARING FINAL
ACCOUNTS THAT HE/SHE SHOULD HAVE THE KNOWLEDGE OF
VARIOUS LWAS OF TRADE LIKE: INCOME TAX, SALES TAX, COMPANIES
ACT, BANKING REGULATIONS ACT.
31. Difference between conventions and concepts
Recognition by accountants
Accounting concepts are recognized by accountants and are part of guidelines for
preparation of financial statements whereas accounting conventions are past practices
which are commonly used but are not formally recognized as guideline for preparation
of financial statements.
Legal recognition
Accounting concepts have been developed by professional bodies and may be backed
by law and other governance bodies whereas accounting conventions are past
practices developed over time and have no backing by governance bodies.
Part of accounting standards
Accounting concepts are part of accounting standards whereas accounting conventions
have been developed to deal with the changes in financial reporting landscape that are
not yet part of accounting standards but can become part of it in future.
32. • Accounting concepts and conventions both are very similar to each other and aim
to improve the presentation of financial statements by providing some guidelines
for preparing true and fair financial statements. Major difference between two is
that accounting concepts are officially recognized and written in guidelines
by accountants whereas accounting conventions are not officially
recognized and written in guidelines by accountants but have been
developed over time.