Accounting principles , conventions and concepts
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This document discusses accounting principles, conventions, and concepts. It defines generally accepted accounting principles (GAAP) as rules, guidelines, and principles derived from experience and practice that become accepted. The major accounting conventions discussed are conservatism, disclosure, and consistency. Finally, the document outlines 12 key accounting concepts including the period concept, dual aspect concept, money measurement concept, and accrual concept.
Accounting principles , conventions and concepts
- 2. Generally accepted accounting principles ( GAAP ) It may be expressed as those rules , guidelines and principles which are derived from experience and practice and when they are useful to accounting practice they , then become accepted as accounting principle . If any principle possess all the above characteristics , and they are accepted by all ( Professional Accountants , courts , government , business executives , taxation experts ) then they are known as accounting principles .
- 3. Accounting Conventions Accountancy is based on usage and customs which is in use since long . Naturally accountants have to adopt that usage or customs . These are termed as conventions in accounting . Major conventions are used in preparation of final accounts also . 1. Conservatism – Every sincere businessman makes an estimate of future losses and then some provision for it is made . Businessman mostly ignore the items of future profit . In Nutshell , conservatism states as “anticipate no profit , and provide for all possible losses” .
- 4. 2. Discloser – While making accounting records , care should be taken to disclose all material information and not to conceal information and facts . Here emphasis is only on material information and not on immaterial information . 3. Consistency – Continuance of one practice in number of year indicates consistency .Whatever accounting practice has been adopted in one accounting year , same should be continued in other future years also . 4. Materiality – Accounting record should be made of all material facts and immaterial items may either be mixed with material items and then recorded or these may be ignored. It has a key position in accounting but forms a base for accounting .
- 5. Accounting Concepts Period concept Dual Concept Money measurement concept Realization Concept Separate Entity Concept Cost Concept Going Concern Concept Accounting Equivalence Verifiable Objective Evidence Concept Capital Concept Matching Concept Accrual Concept
- 6. 1. Period Concept - Every Businessman wants to know the result of his investment and efforts after a certain period . Usually one year period is regarded as an ideal for this purpose . It may be of 2 years 6 months or 3 months also. This period is called accounting period. 2. Dual Aspect – Accounting concept is that every transaction affects two ACCOUNTS . This is why double entry system of book – keeping came into existence . This concept is the foundation on which the entire system if book-keeping and accountancy is based. 3. Money Measurement – Only those transactions are recorded in the books of accounts which can be expressed in money .Those transactions which cannot be expressed in money fall beyond the scope of accounting .
- 7. 4. Realization Concept – According to this concept , revenue is considered as being earned on the date at which it is realized i.e on the date when the property in goods passes to the buyer and he becomes liable to pay. 5. Separate Entity Concept – Business is treated separate from its owners . All the transactions are recorded in the books of business and not in the books of proprietor . On the basis of this concept the proprietor is treated as a creditor to the business. 6. Cost Concept – Accounting to this concept , fixed assets are recorded at the price or which they are acquired, i.e. cost less depreciation . This value is called book value .
- 8. 7. Going Concern – According to this concept , the business shall continue to exist until it is liquidated and transactions are recorded from this point of view . 8. Equivalence Concept – The proprietor provides the funds for acquisition of assets , hence the assets owned by the business must be equal to the funds provided by the proprietor which is technically called “Equity” i.e. Assets =Equity 9. Verifiable Objective Evidence – The concept relates with the verification of accounting record with the outside evidence . This concept means that there is some evidence in ascertaining the correctness of the information reported.
- 9. 10. Capital Concept – this concept is that record for capital be made separately . Proprietor may contribute capital either in cash or in goods or partly in cash and partly in goods . 11. Matching of cost and Revenue Concept – Every businessman is eager to make maximum profit at minimum cost . Hence , in an accounting period namely one year , he tries to find out revenue and cost of this year and compares it with that of another year , and thus he can make an idea about progress or downfall of business . 12. Accrual Concept – The net loss made during the year decreases owners equity i.e. capital . Excess of revenue income over revenue expenses is net profit , while excess of revenue expense over revenue income is loss .