Accounting concepts and conventions
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The document discusses various accounting concepts and conventions essential for understanding financial statements, including the business entity concept, monetary concept, and going concern concept. It emphasizes the importance of accounting principles that have developed over time due to technological advancements and changes in the business environment. Additionally, it covers key conventions like consistency, conservatism, and materiality that guide accountants in recording and reporting financial information.
Accounting concepts and conventions
- 1. TRINITY INSTITUTE OF PROFESSIONAL STUDIES Sector – 9, Dwarka Institutional Area, New Delhi-75 Affiliated Institution of G.G.S.IP.U, Delhi B.COM(H) 888101 FINANCIAL ACCOUNTING BY: NAMRATA YADAV
- 2. TRINITY INSTITUTE OF PROFESSIONAL STUDIES Sector – 9, Dwarka Institutional Area, New Delhi-75 ACCOUNTING CONCEPTS AND CONVENTIONS • “Accounting was born without notice and brought up in negligence”. It means accountancy was first practiced and its principles were developed later on. The accounting principles grew in beginning out of general ideas or opinions (called concepts) and conventions. So accounting principles are concepts and conventions.
- 3. TRINITY INSTITUTE OF PROFESSIONAL STUDIES Sector – 9, Dwarka Institutional Area, New Delhi-75 ACCOUNTING CONCEPTS An accounting concept is a basic assumption or an opinion for recording business transactions which ultimately lead to the preparation of basic financial statements. An assumption is something that is accepted as true without proof. It is also true of an opinion which does not need of proof. Accounting concepts are the foundations of the accounting information useful for various users. Accounting concepts have developed over a period of time due to following reasons: • New inventions, improvement in technology, globalization and introduction of new types of business transactions. • Changes in legal, economic and social environments.
- 4. TRINITY INSTITUTE OF PROFESSIONAL STUDIES Sector – 9, Dwarka Institutional Area, New Delhi-75 ACCOUNTING CONCEPTS BUSINESS ENTITY CONCEPT MONETARY CONCEPT GOING CONCERN CONCEPT HISTORICAL COST CONCEPT DUAL ASPECT CONCEPT ACCOUNTING PERIOD CONCEPT REALISATION CONCEPT ACCRUAL CONCEPT MATCHING CONCEPT OBJECTIVITY CONCEPT
- 5. TRINITY INSTITUTE OF PROFESSIONAL STUDIES Sector – 9, Dwarka Institutional Area, New Delhi-75 ACCOUNTING CONCEPTS • BUSINESS ENTITY CONCEPT : A business is treated as a separate entity that is distinct from its owner(s ), and all other accounting entities and hence a distinction should be made between personal and business transactions and transactions of one business and that of the other business. E.g., personal expenses of a proprietor are considered as drawings and not business expenses. • MONETARY CONCEPT: according to monetary concept, only those transactions which are capable of being expressed in terms of money are included in the accounting records.
- 6. TRINITY INSTITUTE OF PROFESSIONAL STUDIES Sector – 9, Dwarka Institutional Area, New Delhi-75 ACCOUNTING CONCEPTS • GOING CONCERN CONCEPT: the enterprise is viewed as a going concern i.e. as a continuing operations for a foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation is there. Valuation of assets and liabilities on historical cost becomes irrelevant is this concept is not there. • HISTORICAL COST CONCEPT: an asset is recorded in the accounting records at the price paid to acquire it at the time of its acquisition and the cost becomes the basis for the treatment during the period of acquisition and in the subsequent accounting periods.
- 7. TRINITY INSTITUTE OF PROFESSIONAL STUDIES Sector – 9, Dwarka Institutional Area, New Delhi-75 ACCOUNTING CONCEPTS • DUAL ASPECT CONCEPT: two fold aspect of a transaction is known as duality. This duality is the basis of all double entry records. The entry made for each transaction is composed two parts – one for debit and other for credit. Every debit has equal amount of credit. ASSETS = LIABLITIES + CAPITAL • ACCOUNTING PERIOD CONCEPT : the economic life of an enterprise is split into periodic intervals known as accounting periods, at the end of which an income statement and position statement are prepared to ascertain the financial performance and position of the business.
- 8. TRINITY INSTITUTE OF PROFESSIONAL STUDIES Sector – 9, Dwarka Institutional Area, New Delhi-75 ACCOUNTING CONCEPTS • REALISATION CONCEPT: it says as to when a business transaction such as sale of goods or service etc., gives legal right to the receipt of money or money’s worth. It is related to the point of time at which revenue is to be recognized. E.g., X company manufactured a car worth rupees five lakh in 2013 but it sold the car in 2015, then under this concept sales will be recorded in 2015. • ACCRUAL CONCEPT: it says that revenue and costs are recognized as they are earned or incurred and recorded in the financial statements of the periods to which they relate. For companies it is mandatory to maintain records on accrual basis under the Companies Act, 1956.
- 9. TRINITY INSTITUTE OF PROFESSIONAL STUDIES Sector – 9, Dwarka Institutional Area, New Delhi-75 ACCOUNTING CONCEPTS • MATCHING CONCEPT: according to this concept, the expenses incurred in an accounting period should be matched with the revenues recognized in that period. If revenue is recognized on all goods sold during a period, cost of those goods sold should be charged to that period. • OBECTIVITY CONCEPT: this concept says that the recording of the business or accounting transactions should not be influenced by personal bias of either the management or the accountant who prepares the accounts. As such all the accounting entries must be supported by some source documents such as purchase and sales invoices, pay-in-slips, vouchers etc.
- 10. TRINITY INSTITUTE OF PROFESSIONAL STUDIES Sector – 9, Dwarka Institutional Area, New Delhi-75 ACCOUNTING CONVENTIONS • An accounting convention is a rule or an accepted method or procedure or a statement of practice which is adopted either by general agreement or common consent which may be in writing or implied. Accounting conventions are in fact based on custom or practice which have been in use for a long period of time and which guide the accountants while recording the business transactions and preparing the profit & loss account and balance sheet.
- 11. TRINITY INSTITUTE OF PROFESSIONAL STUDIES Sector – 9, Dwarka Institutional Area, New Delhi-75 ACCOUNTING CONVENTIONS CONSISTENCY CONVENTION CONVENTION OF CONSERVATISM CONVENTION OF MATERIALITY CONVENTION OF FULL DISCLOSURE
- 12. TRINITY INSTITUTE OF PROFESSIONAL STUDIES Sector – 9, Dwarka Institutional Area, New Delhi-75 ACCOUNTING CONVENTION • CONVENTION OF CONSISTENCY: consistency convention means that the same accounting practices will be used for similar items from one accounting period to another. It means that accounting information is useful only if it can be compared with the similar within same firm for few years and with similar information between two or more firms for the same time period. • CONVENTION OF CONSERVATISM: the convention of conservatism means policy of playing safe or prudence or caution. It means that while recording the business transactions and preparing the financial statements, the accountant should take into consideration all prospective or future losses and risks and make adequate provisions for them but the prospective profits should not be taken into consideration, that is, they should be ignored.
- 13. TRINITY INSTITUTE OF PROFESSIONAL STUDIES Sector – 9, Dwarka Institutional Area, New Delhi-75 ACCOUNTING CONVENTIONS • CONVENTION OF MATERIALITY: convention of materiality means that in accounting only important and relevant information should be provided to the users of financial information, that is, only material information should be supplied. The rationale behind this convention is that if insignificant information will be recorded in the books then the books will become overburdened. • CONVENTION OF FULL DISCLOSURE: the convention suggests that every financial statement should fully disclose all relevant information that affects the average investor. Full disclosure means that there should be full, fair and adequate disclosure of accounting information.