acounting pricpls
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Click to edit Master subtitle styleClick to edit Master subtitle styleAccounting PrinciplesAccounting Principles
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Accounting ConceptsAccounting Concepts
n Accounting concepts include the assumptions andAccounting concepts include the assumptions andconditions on which the science of accounting isconditions on which the science of accounting isbased.based.
n
These are also known as accounting standards.These are also known as accounting standards.n Important accounting concepts are:Important accounting concepts are:n Separate entity conceptSeparate entity conceptn Going concern conceptGoing concern conceptn Money measurement conceptMoney measurement conceptn Cost conceptCost conceptn Dual aspect conceptDual aspect conceptn Accounting period conceptAccounting period conceptn Realization conceptRealization concept
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Money Measurement Concept Money Measurement Concept
n The concept of money measurement states that only thoseThe concept of money measurement states that only those
transactions and happenings in an organisation which can betransactions and happenings in an organisation which can be
expressed in terms of money such as sale of goods or paymentexpressed in terms of money such as sale of goods or payment
of expenses or receipt of income, etc. are to be recorded in theof expenses or receipt of income, etc. are to be recorded in thebook of accounts. All such transactions or happenings whichbook of accounts. All such transactions or happenings which
can not be expressed in monetary terms,can not be expressed in monetary terms,
n for example, the appointment of a manager, capabilities of itsfor example, the appointment of a manager, capabilities of its
human resources or creativity of its research departmenthuman resources or creativity of its research department
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Going Concern Concept Going Concern Concept
The concept of The concept of going concern assumes that agoing concern assumes that a
business firm would continue to carrybusiness firm would continue to carry out itsout its
operations indefinitely, i.e. for a fairly long periodoperations indefinitely, i.e. for a fairly long periodof time andof time and
would not be liquidated in the foreseeable future.would not be liquidated in the foreseeable future.
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Accounting Period Concept Accounting Period Concept
Accounting period refers to the span of time at the end of Accounting period refers to the span of time at the end of
which the financial statements of an enterprise are prepared,which the financial statements of an enterprise are prepared,
to know whether it has earned profits or incurred lossesto know whether it has earned profits or incurred losses
during that period and what exactly is the position of itsduring that period and what exactly is the position of its
assets and liabilities at the end of that period. Suchassets and liabilities at the end of that period. Such
information is required by different user at regular intervalinformation is required by different user at regular interval
for various purposes, as no firm can wait for long to know itfor various purposes, as no firm can wait for long to know it
financial results as various decisions are to be taken atfinancial results as various decisions are to be taken atregular intervals on the basis of such information.regular intervals on the basis of such information.
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Cost Concept Cost Concept
n The cost concept requires that all assets areThe cost concept requires that all assets are
recorded in the book of accounts at their recorded in the book of accounts at their
purchase price, which includes cost of purchase price, which includes cost of acquisition, transportation, installation andacquisition, transportation, installation and
making the asset ready to usemaking the asset ready to use
n
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Revenue RecognitionRevenue Recognition
(Realisation) Concept (Realisation) Concept n The concept of The concept of revenue recognition requiresrevenue recognition requires
that the revenue for a businessthat the revenue for a business transactiontransaction
should be included in the accounting recordsshould be included in the accounting recordsonly when it is realised.only when it is realised.
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Matching Concept Matching Concept
n The process of ascertaining the amount of profitThe process of ascertaining the amount of profit
earned or the loss incurred during a particular earned or the loss incurred during a particular
period involves deduction of related expenses fromperiod involves deduction of related expenses fromthe revenue earned during that period. Thethe revenue earned during that period. The
matching concept emphasizes exactly on thismatching concept emphasizes exactly on this
aspect.aspect.
n It states that expenses incurred in an accountingIt states that expenses incurred in an accounting
period should be matched with revenues duringperiod should be matched with revenues during
that period.that period.
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Full Disclosure Concept Full Disclosure Concept
n The financial statements makes a full, fair and adequateThe financial statements makes a full, fair and adequate
disclosure of all information which is relevant for takingdisclosure of all information which is relevant for taking
financial decisionsfinancial decisions
n The principle of full disclosure requires that all material andThe principle of full disclosure requires that all material and
relevant facts concerning financial performance of anrelevant facts concerning financial performance of an
enterprise must be fully and completely disclosed in theenterprise must be fully and completely disclosed in the
financial statements and their accompanying footnotes.financial statements and their accompanying footnotes.
n
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Consistency Concept Consistency Concept
n The accounting information provided by theThe accounting information provided by the
financial statements would be useful infinancial statements would be useful in
drawing conclusions regarding the workingdrawing conclusions regarding the workingof an enterprise only when it allowsof an enterprise only when it allows
comparisons over a period of time as well ascomparisons over a period of time as well as
with the working of other enterprises.with the working of other enterprises.
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Conservatism Concept Conservatism Concept
n The concept of conservatism (also calledThe concept of conservatism (also called
‘prudence’) provides guidance for recording‘prudence’) provides guidance for recording
transactions in the book of accounts and istransactions in the book of accounts and isbased on the policy of playing safebased on the policy of playing safe
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Objectivity Concept Objectivity Concept
n The concept of objectivity requires that accountingThe concept of objectivity requires that accounting
transaction should be recorded in an objective manner,transaction should be recorded in an objective manner,
free from the bias of accountants and othersfree from the bias of accountants and others
n This can be possible when each of the transaction isThis can be possible when each of the transaction is
supported by verifiably documents or vouchers. For supported by verifiably documents or vouchers. For
example, the transaction for the purchase of materialsexample, the transaction for the purchase of materials
may be supported by the cash receipt for the money paidmay be supported by the cash receipt for the money paid
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Accounting ConventionsAccounting Conventions
n Accounting conventions include the customsAccounting conventions include the customs
and traditions that assists the accountantsand traditions that assists the accountants
in preparing accounting statements.in preparing accounting statements.
n Important accounting conventions are:Important accounting conventions are:n Convention of conservatismConvention of conservatism
n Convention of full disclosureConvention of full disclosure
n Convention of consistencyConvention of consistency
n Convention of materialityConvention of materiality
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Institute of Chartered AccountantsInstitute of Chartered Accountants
of Indiaof India
n Council of Institute of Chartered Accountants issuesCouncil of Institute of Chartered Accountants issues
from time-to-time preface to the statements of from time-to-time preface to the statements of
accounting standards that defines the variousaccounting standards that defines the various
aspects of accounting standards.aspects of accounting standards.n It established an Accounting Standards BoardIt established an Accounting Standards Board
(ASB) on 22(ASB) on 22ndnd April, 1977.April, 1977.
n
The function of ASB is to formulate accountingThe function of ASB is to formulate accountingstandards, which are then established by thestandards, which are then established by the
Council of Institute of Chartered Accountants.Council of Institute of Chartered Accountants.
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Systems of Book-KeepingSystems of Book-Keeping
n Two types of systems of book-keeping are:Two types of systems of book-keeping are:n Single entry systemSingle entry system: It is used to record only: It is used to record only
cash and personal accounts.cash and personal accounts.
n Double entry systemDouble entry system: It is used to record each: It is used to record each
transaction under two different accounts. Ittransaction under two different accounts. It
is more reliable and efficient than theis more reliable and efficient than the
single entry system.single entry system.n
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Preface to the Statements of Preface to the Statements of
Accounting StandardsAccounting Standards
n It defines standards related to followingIt defines standards related to following
features:features:n Formation of accounting standards boardFormation of accounting standards board
n Objectives and functions of the AccountingObjectives and functions of the Accounting
Standards BoardStandards Board
n General purpose financial statementsGeneral purpose financial statements
n Scope of accounting standardsScope of accounting standards
n Procedure for issuing an accounting standardProcedure for issuing an accounting standard
n Compliance with the accounting standardsCompliance with the accounting standards
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Difference Between Double EntryDifference Between Double Entry
and Single Entry Systemsand Single Entry Systems
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Accounting EquationAccounting Equation
n It is defined as:It is defined as:
Assets = EquitiesAssets = Equities
Or, Assets = Liabilities + CapitalOr, Assets = Liabilities + Capital
n Assets refers to the properties owned by a businessAssets refers to the properties owned by a business
n Equities refers to the rights to the properties.Equities refers to the rights to the properties.
n Liabilities refers to the equity of creditors thatLiabilities refers to the equity of creditors that
represent debts of the business.represent debts of the business.n Capital refers to the equity of owners of theCapital refers to the equity of owners of the
business.business.
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Systems of AccountingSystems of Accounting
n Two basic systems of accounting are:Two basic systems of accounting are:
n Cash system of accountingCash system of accounting: In this system, entries are: In this system, entries are
made only when cash is received or paid. It is followedmade only when cash is received or paid. It is followed
by the Government of various countries.by the Government of various countries.
n Mercantile system of accountingMercantile system of accounting: In this system, entries: In this system, entries
are made for amount that is due for payment or receipt.are made for amount that is due for payment or receipt.
It is followed by the industrial and commercial firms.It is followed by the industrial and commercial firms.
n Mercantile system is preferred over cash systemMercantile system is preferred over cash system
because it considers the effect of transactions andbecause it considers the effect of transactions and
reflects the financial position of the company.reflects the financial position of the company.
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