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Accounting principle

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This presentation gives the insight of accounting concepts and principle its easy language help every one to make understand basics of accounting.

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Accounting principle

  1. 1. MEANING AND NATURE OF ACCOUNTING PRINCIPLE VEENA MADAAN M.B.A (Finance)
  2. 2. MEANING OF GAAP  Generally Accepted Accounting principles:  Principles of accounting are the general law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice  According to American Institute of Certified Public Accountants(AICPA): GAAP have substantial authoritative support and general acceptability. GAAP must be relevant (meaningful), objective (reliable) and feasible(implemented without much cost and complexity)
  3. 3. Classification of Accounting Principles Accounting Concepts Accounting Convention
  4. 4. Accounting Concepts Accounting concepts are basic assumptions or fundamental propositions with in which accounting operates. They are generally accepted accounting rules based on which transactions are recorded and financial statements are prepared. It is important to follow the accounting concept because it enables the user of financial statements to understand them better and in the same manner
  5. 5. Accounting Conventions Accounting conventions are the outcome of accounting practices or principles being followed by the enterprise over a period of time conventions may undergo a change with time to bring about improvement in the quality of accounting information.
  6. 6. Accounting Concepts Going Concern Assumption Consistency Assumption Accrual Assumption
  7. 7. Accounting Principles Accounting Entity/Business Entity Money Measurement. Accounting Period Principle. Full Disclosure Principle. Materiality Principle. Prudence / Conservative Principle. Cost Concept /Historical Cost Principle. Matching Concept / Matching Principle
  8. 8.  Revenue Recognition Concept.  Verifiable Objective concept.  Dual Aspect / Duality Principle.
  9. 9. Consistency Assumption Once selected and adopted, should be applied consistently year after year. The concept helps in better understanding of accounting information and makes it comparable with that of previous years.
  10. 10. Going concern Assumption It is assumed that business shall continue for a foreseeable period and there is no intention to close the business or scale down its operations significantly. This implies that it will not be dissolved in the immediate future unless there is clear evidence of closure
  11. 11. Accrual Assumption A transaction is recorded in the book of accounts at the time when it is entered information and not when the settlement take place.Thus, revenue is recognised when it is realised, i.e., when sale is complete or services are rendered; it is immaterial whether cash is received or not.
  12. 12. Accounting Entity or Business Entity Principle According to this principle business is considered to be separate and distinct from its owners. Business transactions ,therefore, are recorded in the book of accounts from the business point of view and not from that of the owners . Owners being regarded as separate and distinct from business they are considered creditors of the business to the extent of their capital.
  13. 13. Money measurement Principle The money measurement principle transaction and events that can be measured in money term are recorded in the book of account of the enterprise. The principle suffers from two major limitation: a) Transaction and events that cannot be measured in money term are not recorded in the book of account.
  14. 14. b). The value of money is considered to have static value as the transaction are recorded at the value as the transaction date.
  15. 15. Accounting Period Principle The life of an enterprise is broken in to smaller period so that its performance is measured at regular intervals. According to the companies act and banking regulation Act, accounting period should consist of twelve months. The period of twelve month is regarded as ideal and convenient period for accounting. accounting period facilitates the business in assessing its worth after a year
  16. 16. Full Disclosure Principle “There should be complete and understandable reporting on the financial statement of all significant information relating to the economic affairs of the entity”A part from legal requirements good accounting practice require all material and significant information should be disclosed whether information should be disclosed or not always depends on materiality of the information.
  17. 17. Materiality Principle The materiality Principle refers to the relative importance of an item or an event acc to the American accounting association “an item should be regarded as material if there is a reason to believe that knowledge of it would influence the decision of an informed investor". Thus, whether an item is material or not will depend on its nature and/or amount.
  18. 18. Cost concept or Historical Cost principle An assets is recorded in the books of accounts at the price paid to acquire it and the cost is the basis for all subsequent accounting of asset. Asset is recorded at cost at the time of its purchase but is systematically reduced in value by charging depreciation. The market value of an asset may change with the passage of time but for accounting purpose it continues to be shown in the books of accounts at it book value.
  19. 19. Prudence or conservative Principle It takes in to consideration all prospective losses but not the prospective profits. The application of this concept ensure that the financial statements present a realistic picture of the state of affairs of the enterprise and do not paint a better picture than what it actually is the concept of conservatism needs to be applied with more caution and care so that the results reported are not distorted.
  20. 20. Verifiable Objective Concept The verifiable objective concept holds that accounting should be free from personal bias. Measurement that are based on verifiable evidence are regarded an objective. It means all accounting transaction should be evidenced and supported by business document.
  21. 21. Revenue recognition Concept Revenue is considered to have been realised when a transaction has been entered in to an obligation to receive the amount has been established. It is to be noted that recognising revenue and receipt of an amount are two separate aspect . E.g.: An enterprise sell goods in Feb. 2013 & receives the amount in April 2013. revenue of this sales should be recognised in Feb. 2013 when the are sold
  22. 22. Matching Concept or matching Principle It is important to match „ revenues‟ of period with the „expenses‟ of that period to determine correct profit(or loss)for the accounting period.
  23. 23. Dual Aspect or Duality Principle  Every business transaction has double effect . There are two sides of every transaction. This is evident when we study the accounting term i.e., assets, capital and liabilities.  Assets: These are the valuable articles owned by the business.  Capital: it is the proprietor‟s claim against the assets of the business and the cash is the asset of the business itself
  24. 24. Capital=Assets Liabilities: capital invested by the proprietor falls short so the business has to borrow funds and thus the loan on side of the liability of the firm and on the other side it will be in the form of cash or other assets. Capital+ liabilities= asset or Asset = Capital +Liabilities or Capital = Assets – Liabilities or Liabilities= Asset - capital
  25. 25. THANKYOU Download A Hand Full Of Money And Holding A Tree Royalty Free Stock Images - Image: 21217329

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