This document discusses key accounting concepts and conventions used in preparing financial statements according to Generally Accepted Accounting Principles (GAAP). It outlines concepts such as the separate entity concept, going concern concept, money measurement concept, and dual aspect concept. It also covers conventions like conservatism, full disclosure, consistency, and materiality that accountants should follow when preparing financial statements to provide an accurate representation of a company's financial position.

1. Accounting Concepts and
Accounting Conventions

2. GAAP
• The Double entry system of accounting is based
on a set of principles which are called Generally
Accepted Accounting Principles (GAAP).
• GAAP is required for standardization of recording
and reporting of financial information to the user.
• Easy understanding of financial statements by the
users who are aware of the principles.

3. Accounting Concepts
• Accounting Concepts
The term Accounting Concepts includes the assumptions or conditions
upon which the accounting system is based.
(i) Separate entity concept
The business is considered separate entity as an artificial person
separate from the proprietors. That is the reason why the
contribution of the owners of business is considered as liability of
company. The concept is applicable to all forms of business
organization.
Example: In case of a partnership business or sole proprietorship
business though the partners or sole proprietor is not considered
as separate entity in the eye of law. As per accounting purpose
they are considered as separate entity.

4. Going Concern Concept
• Business Entity will continue to operate indefinitely
and that will not be liquidated in the near future.
Indefinite means the business enterprise will not
wound up within the foreseeable future.
• There is neither intention nor the necessity to
liquidate the particular business venture in the
foreseeable future.
• For this Fixed Asset are not valued at sales price.
Depreciation of the fixed asset is calculated on the
basis of their expected live rather than the market
value.

5. Money measurement concept
• Only monetary transactions are recorded in the
books of Accounts. Events or transactions can not
be expressed in monetary terms can not be
recorded in financial statements.
• The team of honest & trustworthy employees is the
most valuable asset of the company, but since
they are not monetary items so they can not be
counted as asset.
COST CONCEPT
An asset is recorded at the piece paid to acquire it
i.e. acquisition cost.

6. Accounting concept continued
• The cost is the basis fir all subsequent accounting
years for the asset.
• The acquisition cost of land is Rs 50000, the asset
is recorded at Rs 50000 even if the market value
of the land becomes Rs 60000 or Rs 40000 in the
subsequent years.
• DUAL ASPECT CONCEPT
• Every Business transaction has a dual effect. Every
transaction has two aspects a debit and an equal amount of
credit.
• Every debit has an equal amount of credit and vice versa.

7. Accounting concept continued
• Starting of Business with Rs 50000.
The dual aspect of the transaction is
Rs 50000 shown as liability and asset also.
Capital (Equities) = Cash ( Current asset)
Rs 50000 = Rs 50000
• Assets = Liabilities + Capital
• ACCOUNTING PERIOD CONCEPT
• According to Going concern concept the business
is expected to run for indefinite time period.
• It is not possible to wait for indefinite time period to
measure the profit or loss o f the Business.

8. Accounting concept continued
• Profit or loss of business is measured periodically.
• The period for profit or loss calculation is known as
Accounting period.
• For the purpose of reporting the Accounting period is
considered as one year.
• MATCHING CONCEPT
• The ultimate object of running as business is to earn profit.
• To measure the profit during a particular accounting period
the revenue of the should be matched with the cost of that
period
• The commission paid to the sales team in 1999 for the sale
of 1998 is taken as cost of sale for 1998. Commission paid in
1999 should be matched with Revenue of 1998.

9. Accounting concept continued
• REALISATION CONCEPT
• Revenue is recognized when a sale is made. Sale is
considered to take place at the point when property of goods
passes to the buyer and the buyer becomes liable to pay.
• A had placed an order to B for sale of goods in the year
2000. After receiving the order B had supplied the goods in
the Year 2001. The sale had considered to take place in the
year 2001 not in the year 2000.
• Revenue is recorded in the books of accounts at the time of
realization.

10. Accounting Conventions
• The term convention includes those guidelines or
traditions which the Accountant should follow at the time of
preparation of accounting statements.
• Convention of Conservatism
1. Recognition of revenue requires better evidence than the
recognition of expenses. The statement implies that be
conservative at the time of calculating the profit.
2. Show cost as much as possible but revenue as less as
possible.
Example: (i) Inventory is valued at cost or market value
whichever is less.
(ii) Creating excess provision for doubtful debts.

11. Accounting Conventions continued
• Convention of Full disclosure
• According to 1956 Company Act the Financial statements
(Profit and Loss Account, Balance Sheet) should reflect the
true and fair view of the state of affairs of the Company.
• The Financial Statements should be honestly prepared and
sufficiently disclose all the necessary information which are
of interest of the Proprietors, Creditors, Lenders, Investors &
Government etc.
• The financial information should show the actual financial
position of the company.
• Convention of Consistency
• Accounting practices should remain same from period to
period

12. Accounting Conventions continued
• If inventory is valued at FIFO or LIFO the same method should
be used for inventory valuation year after year.
• Suppose the Depreciation on Fixed asset is calculated as per
straight line method in the current year. So depreciation
should not be calculated as per diminishing balance method
from the next year.
• It does not impose any restriction in change in the valuation
purpose.
• If adoption of such technique inflates or deflates the profit that
should be mentioned as notes with the financial statements.
• Convention of materiality
• The Accountant should attach importance to material details.
• E.g. While sending the debtors about his statement of
accounts complete details have to be given.
• A statement of outstanding debtors is prepared for sending to
the Board of Directors may be rounded up to the nearest ten or
hundred rupee

13. Accounting Conventions
Continued
• A statement of outstanding debtors is prepared for sending to
the Board of Directors may be rounded up to the nearest ten
or hundred rupee.
• It is also permitted to ignore the paisa at the time of
preparing the Financial Statement.
• Similarly for Tax purpose the income has to be rounded to
nearest ten.