Post on 06-May-2015
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CONCEPT OF ACCOUNTING PRINCIPLES
AND CONVENTIONS
Accounting can be defined as the
process of identifying, measuring,
recording and communicating the
economic events of an organization to
the interested users of the
information.
RECORDING OF FINANCIAL TRANSACTIONS
ONLY.
RECORDING(CASH BOOK,SALES BOOK ETC.)
CLASSIFYING
SUMMARISING
RECORDING IN TERMS OF MONEY
INTERPRETATION OF THE RESULTS
a. TO KEEP SYSTEMATIC RECORD OF BUSINESS TRANSACTIONS.
b. TO CALCULATE PROFIT & LOSSc. TO KNOW THE EXACT REASONS LEADING TOO
NET PROFIT OR NET LOSS.d. TO ASCERTAIN THE FINANCIAL POSITION OF
THE BUSINESS.e. TO ASCERTAIN THE PROGESS OF THE
BUSINESS FROM YEAR TO YEAR.f. TO PREVENT & DETECT ERRORS & FRAUDS.g. TO PROVIDE INFORMATION TO VARIOUS
PARTIES.
FINANCIAL ACCOUNTING
COST ACCOUNTING
MANAGEMENT ACCOUNTING
TAX ACCOUNTING
SOCIAL RESPONSIBILITY
MANAGEMENT(TOP MGT)
EMPLOYEESDIRECTOR(CEO)OWNERLABOUR
DEBTORSFINANCIAL
INSTITUTIONGOVT .CUSTOMERSSUPPLIERS, ETC.
EXTERNAL USERS
Accounting principles can be subdivided into
two categories
Accounting Concepts; and
Accounting Conventions.
Accounting Concepts
Accounting Conventions
The term ‘concept’ is used to connote accounting postulates, that is necessary assumptions and conditions upon which accounting is based. The term ‘convention’ is used to signify customs and traditions as a guide to the presentation of accounting statements.
Accounting Concepts• Business Entity Concept
• Money Measurement Concept
• Cost Concept Or Historical Cost Concept
• Going Concern Concept
• Dual Aspect Concept
• Revenue Recognition (realisation) concept
• Matching Concept
• Accrual concept
• Accounting Period Concept
Accounting Conventions• Convention of Consistency
• Convention of Disclosure
• Convention of Conservation
• Convention of Materiality
Business is treated as a separate entity or unit apart from its owner and others. All the transactions of the business are recorded in the books of business from the point of view of the business as an entity and even the owner is treated as a creditor to the extent of his/her capital.
In accounting, we record only those
transactions which are expressed in
terms of money. In other words, a fact
which can not be expressed in
monetary terms, is not recorded in the
books of accounts.
Transactions are entered in the books of accounts at the amount actually involved. Suppose a company purchases a car for Rs.1,50,000/- the real value of which is Rs.2,00,000/-, the purchase will be recorded as Rs.1,50,000/- and not any more. This is one of the most important concept and it prevents arbitrary values being put on transactions.
It is persuaded that the business will
exists for a long time and transactions
are recorded from this point of view.
Each transaction has two aspects, that
is, the receiving benefit by one party
and the giving benefit by the other.
This principle is the core of
accountancy.
Thus, the dual aspect can be expressed as under
Capital + Liabilities = Assets
or
Capital = Assets – Liabilities
For example, the proprietor of a business starts his business with Cash Rs.1,00,000/-, Machinery of Rs.50,000/- and Building of Rs.30,000/-, then this fact is recorded at two places. That is Assets account (Cash, Machinery & Building) and Capital accounts. The capital of the business is equal to the assets of the business.
Strictly speaking, the net income can be measured by comparing the assets of the business existing at the time of its liquidation. But as the life of the business is assumed to be infinite, the measurement of income according to the above concept is not possible. So a twelve month period is normally adopted for this purpose. This time interval is called accounting period.
It provide more appropriate information about the
performance of business enterprise as compared
to cash basis Accural concept implies equally to
revenues
And expenses.In accrual concept revenue is
recorded when sales are made or services are
rendered and it is immateria; whether cash is
received or not.
Accounting Conventions:
The term ‘convention’ is used to
signify customs and traditions as a
guide to the presentation of
accounting statements.
In order to enable the management to draw important conclusions regarding the working of the company over a few years, it is essential that accounting practices and methods remain unchanged from one accounting period to another. The comparison of one accounting period with that of another is possible only when the convention of consistency is followed.
This principle implies that accounts must be honestly prepared and all material information must be disclosed therein. The contents of Balance Sheet and Profit and Loss Account are prescribed by law. These are designed to make disclosure of all material facts compulsory.
Financial statements are always drawn up on rather a conservative basis. That is, showing a position better than what it is, not permitted. It is also not proper to show a position worse than what it is. In other words, secret reserves are not permitted.
This convention is an exception to the
convention of full disclosure.according to this
convention,items having an insignificant effect
or being irrelevent to the user need not be
disclosed.these unimportant items are either
leftout or merged with other items,otherwise
accounting statements will be unnecessarily
overburdened.