Accounting concepts and conventions(mba)
- 3. The term ‘concept’ is used to connote accounting postulates, that is necessary assumptions and conditions upon which accounting is based. These are the theories on how and why certain categories of transactions should be treated in a particular manner.
- 5. BUSINESS ENTITY CONCEPT • Business is treated as separate & distinct from its members • Separate set of books are prepared. • Proprietor is treated as creditor of the business. • For other business of proprietor different books are prepared.
- 6. • The business and its owner(s) are two separate entities
- 7. Hence… The Books Of Accounts are prepared from the point of view of the business
- 9. The Personal Transactions of the Owner are not recorded. For Example: A Car purchased by the owner for personal use is not Recorded in the Books Of Account Of the Business.
- 11. GOING CONCERN CONCEPT • Business will continue for a long period. • As per this concept, fixed assets are recorded at their original cost & depreciation is charged on these assets. • Because of this concept, outside parties enter into long term contracts with the enterprise.
- 12. It is assumed that the entity is a going concern, i.e., it will continue to operate for an indefinitely long period in future and transactions are recorded from this point of view.
- 14. MONEY MEASUREMENT CONCEPT • Transactions of monetary nature are recorded. • Transactions of qualitative nature, even though of great importance to business are not considered.
- 15. In accounting, a record is made only of those transactions or events which can be measured and expressed in terms of money.
- 16. Non monetary transactions are not recorded in accounting. Attitude Experience Innovativeness Honesty Team work Passion skill
- 18. ACCOUNTING PERIOD CONCEPT • Entire life of the firm is divided into time intervals for ascertaining the profits/losses are known as accounting periods. • Accounting period is of two types- financial year(1st Apr to 31st March) & calendar year(1st Jan to 31st Dec).
- 19. • For taxation purposes financial year is adopted as prescribed by the Govt. • Companies having their shares listed on stock exchange publishes their quarterly results.
- 20. For measuring the financial results of a business periodically, the working life of an undertaking is split into convenient short periods called accounting period.
- 22. Cost Concept
- 23. HISTORICAL COST CONCEPT • Assets are recorded at their original price. • This cost serves the basis for further accounting treatment of the asset. • Acquisition cost relates to the past i.e. it is known as historical cost.
- 24. An asset acquired by a concern is recorded in the books of accounts at historical cost (i.e., at the price actually paid for acquiring the asset). The market price of the asset is ignored.
- 27. DUAL ASPECT CONCEPT • Every transaction recorded in books affects at least two accounts. • If one is debited then the other one is credited with same amount. • This system of recording is known as “DOUBLE ENTRY SYSTEM”. • ASSETS = LIABILITIES + CAPITAL
- 28. For Every Debit, there is a Credit Every transaction should have a two- sided effect to the extent of same amount
- 29. • Cash Account Rs. 10,000 Debit • Sales Account Rs. 10,000 Credit For Example: Cash Sales Rs. 10,000
- 30. • Purchases Account Rs. 20,000 Debit • Ram’s Account Rs. 18,000 • Discount Recd. Account 2,000 Credit For Example: Purchased From Ram goods worth Rs. 20,000 and discount received Rs. 2,000.
- 31. This Concept has resulted in THE ACCOUNTING EQUATION
- 34. REVENUE RECOGNITION/REALISATION CONCEPT • Revenue means the addition to the capital as a result of business operations. • Revenue is realised on three basis-: 1. Basis of cash 2. Basis of sale 3. Basis of production
- 35. Profit is earned when goods or services are provided /transferred to customers. Thus it is incorrect to record profit when order is received, or when the customer pays for the goods.
- 36. Matching Concept
- 37. MATCHING CONCEPT • All the revenue of a particular period will be matched with the cost of that period for determining the net profits of that period. • Accordingly, for matching costs with revenue, first revenue should be recognised & then costs incurred for generating that revenue should be recognised.
- 38. The matching principle ensures that revenues and all their associated expenses are recorded in the same accounting period. The matching principle is the basis on which the accrual accounting method of book- keeping is built.
- 39. For Example Salary paid in 2012-13 relating to 2011-12 Such salary is treated as Expenditure for 2011-12 under Outstanding Salaries Account, not for the year 2012-13
- 41. Accounting Conventions are the common practices which are universally followed in recording and presenting accounting information of business. It helps in comparing accounting data of different business or of same units for different periods.
- 42. Materiality
- 43. CONVENTION OF MATERIALITY • According to American Accounting Association, “An item should be regarded as material if there is reason to believe that knowledge of it would influence decision of informed investor.” • It is an exception to the convention of full disclosure. • Items having an insignificant effect to the user need not to be disclosed.
- 44. Only those transactions, important facts and items are shown which are useful and material for the business. The firm need not record immaterial and insignificant items.
- 45. Illustration: Company XYZ Ltd. bought 6 months supplies of stationary worth $600. Question: Should the Company spread the cost of this stationary for 6 months by expensing off $100 per month to the income statement? Answer: Based on this concept, as the amount is so small or immaterial, it can be expensed off in the next month instead of tediously expensing it in the next 6 months.
- 46. Full Disclosure
- 47. CONVENTION OF FULL DICLOSURE • Information relating to the economic affairs of the enterprise should be completely disclosed which are of material interest to the users. • Proforma & contents of balance sheet & P&L a/c are prescribed by Companies Act. • It does not mean that leaking out the secrets of the business.
- 48. Financial Statements and their notes should present all information that is relevant and material to the user’s understanding of the statements.
- 50. Conservatism
- 51. CONVENTION OF CONSERVATISM • All anticipated losses should be recorded but all anticipated gains should be ignored. • It is a policy of playing safe. • Provisions is made for all losses even though the amount cannot be determined with certainity
- 52. Anticipate No Profits but Provide for all Losses Accountant should always be on side of safety.
- 53. For Example • Making Provision for Bad and Doubtful Debts • Showing Depreciation on Fixed Assets, but not appreciation
- 54. Consistency
- 55. CONVENTION OF CONSISTENCY • Accounting method should remain consistent year by year. • This facilitates comparison in both directions i.e. intra firm & inter firm. • This does not mean that a firm cannot change the accounting methods according to the changed circumstances of the business.
- 56. The accounting practices and methods should remain consistent from one accounting period to another. Whatever accounting practice is followed by the business enterprise, should be followed on a consistent basis from year to year.
- 57. For Example 2009-10 • Straight Line Method 2010-11 • Written Down Value Method 2011-12 • Units of Measure Method Year Method of Depreciation followed
- 58. Thank you