Accounting Concepts and Principles

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IntroductionActually there are a number of accounting concepts and principles based on which we prepare our accountsThese generally accepted accounting principles lay down accepted assumptions and guidelines and are commonly referred to as accounting concepts

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Accounting Concepts

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Accounting Principles/Concepts Business entity Money Measurement/stable monetary unitGoing ConcernHistorical CostPrudence/conservatismDuality

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Accruals/matchingRealizationUniformityDisclosureRelevance

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Accounting Conventions:- Full disclosureConsistency Conservatism Materiality Objectivity *

Business Entity AssumptionMeaningThe business and its owner(s) are two separate existence entityAny private and personal incomes and expenses of the owner(s) should not be treated as the incomes and expenses of the business

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Business Entity Assumptions

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ExamplesInsurance premiums for the owners house should be excluded from the expense of the business

The owners property should not be included in the premises account of the business

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Money Measurement Assumption

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Money MeasurementMeaningAll transactions of the business are recorded in terms of moneyIt provides a common unit of measurementExamplesMarket conditions, technological changes and the efficiency of management would not be disclosed in the accounts because it is qualitative aspects.

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Going Concern Assumption

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Going ConcernMeaningThe business will continue in operational existence for the long period

Financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise

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Accounting Period AssumptionThe economic life of an enterprise is artifically split into periodic intervals known as accounting periods .At the end of which the income and position statement are prepared

Example accounting period is starting from April and ending at March

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Duality 2 aspects of the transactions one debit and one credit

Example : Sold goods to shyam .(Dual Aspects would be )Cash Coming in Goods going out

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Historical Cost

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Historical CostMeaningAssets should be shown on the balance sheet at the cost of purchase instead of current valueExampleThe cost of fixed assets is recorded at the date of acquisition cost. The acquisition cost includes all expenditure made to prepare the asset for its intended use. It included the invoice price of the assets, freight charges, insurance or installation costs

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Materiality

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MaterialityMeaningItems or events having insignificant effect need not to be disclosed Immaterial amounts may be aggregated with the amounts of a similar nature or function and need not be presented separateMateriality depends on the size and nature of the item Materiality also depends upon the size of business

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ExampleSmall payments such as postage, stationery and cleaning expenses should not be disclosed separately. They should be grouped together as sundry expenses

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Objectivity

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ObjectivityMeaningThe accounting information should be free from bias and capable of independent verificationThe information should be based upon verifiable evidence such as invoices or contracts It means recording those transactions in the books of accounts which are having adequate evidence to support

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ExampleThe recognition of revenue should be based on evidence such as the delivery of goods or the issue of invoices or the bills the company is having

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Consistency

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ConsistencyMeaningCompanies should choose the most suitable accounting methods and treatments, and consistently apply them in every periodChanges are permitted only when the new method is considered better and can reflect the true and fair view of the financial position of the companyThe change and its effect on profits should be disclosed in the financial statements

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ExamplesIf a company adopts straight line method and should not be changed to adopt reducing balance method in other periodIf a company adopts LIFO Last in first out) it should not change it to FIFO ( first-in-first-out) method

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GAAP??????

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RealizationMeaningRevenues should be recognized when the major economic activities have been completedSales are recognized when the goods are sold and delivered to customers or services are rendered

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Recognition of revenueThe realization concept develops rules for the recognition of revenueThe concept provides that revenues are recognized when it is earned, and not when money is receivedSince revenue is a principal component in the measurement of profit, the timing of its recognition has a direct effect on the profit

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Disclosure

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DisclosureMeaningFinancial statements should be prepared to reflect a true and fair view of the financial position and performance of the enterpriseAll material and relevant information must be disclosed in the financial statements

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Uniformity

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UniformityMeaningDifferent companies within the same industry should adopt the same accounting methods and treatments for like transactionsThe practice enables inter-company comparisons of their financial positions

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Relevance

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RelevanceMeaningFinancial statements should be prepared to meet the objectives of the usersRelevant information which can satisfy the needs of most users is selected and recorded in the financial statement

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TimelinessIt says that timely information should be made available to the decision makers

If there is any delay in reporting the information to the decision makers it might lose is relevance

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Example If half yearly data reports are demanded those reports should be prepared and should me made available.

Its not that the person is making half yearly data available on yearly basis .

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