accounting techniques

8/7/2019 Accounting Techniques

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ACCOUNTING

CONCEPTS &CONVENTIONS

BY:-SANDEEP GUPTA(02411403910)MBA-I


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Basic accounting concepts are: Business entity concept

Money measurement concept

Going concern concept

Accounting period concept

Accounting cost concept

Duality aspect concept

Realisation concept

Accrual concept

Matching concept


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Accounting Concept

Meaning of GenerallyAcceptedAccountingPrinciples (GAAP)

GenerallyAcceptedAccounting Principlesmaybedefinedasthoserules ofaction or conductwhicharederivedfrom experienceandpracticeandwhentheyprove useful,they become

acceptedasprinciples ofaccounting.Thegeneralacceptance ofaccountingprinciplesorpracticesdepends onhow wellitmeetthefollowingthree criteria.


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.

Relevance: A principleisrelevantto theextentit

resultinformationthatismeaningfuland usefultothe user ofaccountinginformation.

Objectivity: A principleis objectiveto theextenttheaccountinginformationisnotinfluencedbypersonal bias or judgment ofthosewho provideit.

Feasibility: A principleisfeasibleto theextentitcan beimplementedwithoutmuch complexityorcost


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Basic Accounting Concepts

Separate /BusinessentityConcept

In accounting businessis consideredto beaseparateentityfrom theproprietors.thuswhen

onepersoninvest Rs. 10000 into business itwill be deemed that the proprietor has given

so much moneyto the businessas Suchwill beshownasliabilityinthe books ofanyfirm


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Going concern concept

According to this conceptitisassumedthat

the businesswill continueforalongtimeto

come,thereisneithertheintentionnorthe

necessity to liquiditytheparticular business Onthe basis ofthis concept,depreciationis

charged onthefixedasset.

Thisisanimportantassumption ofaccounting,asitprovidesa basisforshowingthevalue ofassetinthe balancesheet


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ACCOUNTING PERIOD CONCEPT

All the transactions are recorded in the books of accounts onthe assumption that profits on these transactions are to beascertained for a specified period.

This concept requires that a balance sheet and profit andloss account should be prepared at regular intervals.

As per accounting period concept, all the transactions arerecorded in the books of accounts for a specified period oftime. Hence, goods purchased and sold during the period,rent, salaries etc. paid for the period are accounted for andagainst that period only.

This concept assumes that, indefinite life of business isdivided into parts. It may be of one year, six months, threemonths, one month, etc.


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ACCOUNTING COST CONCEPT

Accounting cost concept states that all assets are recorded in the books of

accounts at their purchase price, which includes cost of acquisition,transportation and installation and not at its market price.

Further, it may be clarified that cost means original or acquisition costonly for new assets and for the used ones, cost means original cost lessdepreciation.

The effect of cost concept is that if the business entity does not payanything for acquiring an asset this item would not appear in the books of

accounts. Thus, goodwill appears in the accounts only if the entity haspurchased this intangible asset for a price.

Forexample:

A machine was purchased by XYZ Limited for Rs.500000, formanufacturing shoes. Amount of Rs.1,000 were spent on transporting themachine to the factory site. In addition, Rs.2000 were spent on itsinstallation. The total amount at which the machine will be recorded inthe books of accounts would be the sum of all these items i.e. Rs.503000.Suppose the market price of the same is now Rs. 90000 it will not be

shown at this value.


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Dual aspect concept

Everytransactionrecordedin booksaffectsatleasttwo accounts.

Ifoneisdebitedthenthe other oneiscreditedwithsameamount.

Thissystem ofrecordingis knownas

DOUBLEENTRY SYSTEM.

ASSETS = LIABILITIES + CAPITAL


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REVENUERECOGNITION/REALISATIONCONCEPT

Revenuemeanstheadditionto the capitalasaresult ofbusiness operations.

Revenueisrealized onthree basis-:

1. Basis ofcash

2. Basis ofsale

3. Basis ofproduction


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ACCRUAL CONCEPT

Accrue means to grow; to increase; to

accumulate. According to this concept income isrecognized when it is earned rather than when itis collected. Similarly, expenses are accounted forwhen the benefit from them is derived rather whenthey are paid for.

It helps in knowing actual expenses and actualincome during aparticular time period.

It helps in calculating the net profit of thebusiness.


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MATCHINGCONCEPT

Alltherevenue ofaparticularperiodwill bematchedwiththe cost ofthatperiodfordeterminingthenetprofits ofthatperiod.

Accordingly,formatching costswithrevenue,firstrevenueshould berecognised & thencostsincurredforgeneratingthatrevenue

should berecognised.


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ACCOUNTINGCONVENTIONS

Meaning:

An accounting convention refers to commonpractices which are universally followed inrecording and presenting accounting informationof the business entity. They are followed likecustoms, tradition, etc. in a society.

Accounting Conventions help in comparingaccounting data of different business units or ofthe same unit for different periods.


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The mostimportantconventions

which have been used fora longperiod are :

Convention of consistency

Convention of full disclosure

Convention of materiality

Convention of conservatism


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Convention of consistency

The convention of consistency means that sameaccounting principles should be used for preparing

financial statements year after year.

A meaningful conclusion can be drawn from financialstatements of the same enterprise when there iscomparison between them over a period of time.

But this can be possible only when accounting

policies and practices followed by the enterprise areuniform and consistent over a period of time. Ifdifferent accounting procedures and practices areused for preparing financial statements of different

years, then the result will not be comparable.


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CONVENTION OFFULL DICLOSURE

Informationrelatingto theeconomic affairsoftheenterpriseshould be completely

disclosedwhichare ofmaterialinterestto theusers.

Performa& contents ofbalancesheet & P&L

a/c areprescribed byCompaniesAct.

Itdoesnotmeanthatleaking outthesecrets

ofthe business.


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CONVENTION OFMATERIALITY

The convention of materiality states that, to makefinancial statements meaningful, only material facti.e. important and relevant information should be

supplied to the users of accounting information.

The materiality of a fact depends on its nature and theamount involved.

Thus, according to this convention important and

significant items should be recorded in theirrespective heads and all immaterial or insignificanttransactions should be clubbed under a differentaccounting head.


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CONVENTION OFCONSERVATISM

This convention is based on the principle thatAnticipate no profit, butprovide forall possiblelosses.

Thus, this convention clearly states that profit shouldnot be recorded until it is realised. But if the businessanticipates any loss in the near future, provision

should be made in the books of accounts for the same.

It is useful in the situation of uncertainties anddoubts.


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JOURNEYOF

ACCOUNTING

BEGINS .

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