accounting concepts and conventions
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Accounting Concepts and Conventions
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Accounting Concepts
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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.
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Business Entity
Concept
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• The business and its owner(s) are two separate
entities
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Hence…
The Books Of Accounts are
prepared from the point of view of the
business
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Capital (Liability)
Drawings (Asset)
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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.
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Going Concern Concept
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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.
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Money Measurement Concept
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In accounting, a record is made only of those
transactions or events which can be measured
and expressed in terms of money.
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Non monetary transactions are not recorded in accounting.
Attitude Experience
Innovativeness
HonestyTeam work
Passionskill
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Accounting Period
Concept
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For measuring the financial results of a business periodically, the working life of an undertaking is split into convenient short periods called accounting period.
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Cost Concept
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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.
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Historical Cost Of
Market Value Of
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Dual - Aspect
Concept
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For Every Debit, there is
a Credit
Every transaction should have a two- sided effect to the
extent of same amount
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•Cash Account Rs. 10,000
Debit
•Sales Account Rs. 10,000
Credit
For Example:Cash Sales Rs. 10,000
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•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.
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This Concept has resulted in
THE ACCOUNTING
EQUATION
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Realisation Concept
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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.
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Matching Concept
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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.
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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
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Accounting Conventions
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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.
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Materiality
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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.
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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.
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Full Disclosure
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Financial Statements and
their notes should present all
information that is relevant and
material to the user’s
understanding of the statements.
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Conservatism
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Anticipate No Profits but
Provide for all Losses
Accountant should always be on side of
safety.
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For Example
• Making Provision for Bad and Doubtful Debts• Showing Depreciation on Fixed Assets, but not appreciation
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Consistency
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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.
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For Example
2009-10
• Straight Line Method
2010-11
• Written Down Value Method
2011-12
• Units of Measure Method
Year
Method of Depreciation
followed
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Thank you