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ACCOUNTING CONCEPTS

AND CONVENTIONS

UNIT - I

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Accounting Principles

What do you mean by Accounting Principles.

According to the American Institute of Public

Accountants Accounting principles are the general

laws or rules adopted or professed as a guide to action.

It is a basis of conduct or practice.

Characteristics of Accounting principles:

1. These rules are based on the custom, usages and

traditions.

2. These principles are dynamic and not fixed or rigid.

3. They are designed to make accounting data provide

objectivity, application, usefulness and simplicity to its

users.

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Kinds of Accounting

Principles

Concepts Conventions

1. Entity Concept

2. Money Measurement

3. Accounting Period Concept

4. Going Concern Concept

5. Cost Concept

6. Dual Aspect Concept

7. Matching Principle8. Verifiable Objects

9. Realization Concept

10. Capital Concept

11. Accrual concept

12. True legal position (Full Disclosure)

1. Disclosure Convention

2. Materiality Convention

3. Consistency Convention

4. Conservation Convention

5. CostBenefit Convention

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Entity Concept

Business is treated as a unit or entity apart

from its owners, creditors and others.

Business transactions are recorded in thebooks of accounts from the view point of

the business.

Even the proprietor is treated as a creditorto the extent of his capital.

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Cont

Accounting Period Concept

Necessary to close the accounts at regular

intervals.

Usually a period of 365 days or 52 weeks or 1

year is considered as the accounting period.

Money Measurement

Business transactions and events which are of

financial nature are only recorded.

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Dual Aspect Concept

Dual aspect principle is the basis for Double

Entry System of book-keeping.

All business transactions recorded inaccounts have two aspects - receiving

benefit and giving benefit.

For example, when a business acquires an asset(receiving of benefit) it must pay cash (giving

of benefit).

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Cont

Matching Concept

Matching the revenues earned during an

accounting period with the cost associated withthe period to ascertain the result of the business.

Verifiable & Objective Evidence Concept

Each recorded business transactions in the

books of accounts should have an adequate

evidence to support it.

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Cont

Revenue Realisation Concept

Revenue is considered as the income earned on

the date when it is realised.Unearned or unrealised revenue should not be

taken into account.

Full Disclosure Concept

Accounting statements should disclose fully

and completely all the significant information.

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Conventions

Materiality Principle

The materiality principle requires all relatively

relevant information should be disclosed in thefinancial statements.

Consistency principle

The aim of consistency principle is to preserve

the comparability of financial statements.

The rules, practices, concepts and principles

used in accounting should be continuously

observed and applied year after year.

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Cont

Prudence (Conservatism) Principle

Prudence principle takes into consideration all

prospective losses but leaves all prospectiveprofits.

The essence of this principle is anticipate no

profit and provide for all possible losses.

Cost Benefit Principle

This modifying principle states that the cost of

applying a principle should not be more than

the benefit derived from it.

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Double Entry System

Meaning Of Double Entry System:

According to William Pickles Every businesstransaction has two fold effects and it affects two

accounts. In order to keep a complete record of a

transaction, one account is bound to be debited and the

other is bound to be credited. Recording this two-foldeffect of each transaction is called as Double Entry

System.

Characteristics Of Double Entry System:

1. Effects on two accounts or parties.2. Simultaneous recording

3. Contra-position of two accounts

4. Definite rules of recording

5. Two aspects of transaction.

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Objective of Double-Entry System

1. To facilitate the verification of accuracy of

accounting.

2. To know the position of profi t or loss and the

financial results with the help of Trial Balance.

3. To know the progress of the businessat the end ofeach accounting period.

4. To check and control misappropriation and

defalcation by employees.

5. To have proper and systematicrecord of business

for future reference.

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Stages of recording under DESThe entire accounting process is divided into3

main stages:1. Original Record: The books in which the transaction is recorded

for the first time is called as Book of OriginalEntry. It is also known

as Journal.

2. Classification: All the transactions recorded in the journal aresorted into different accounts. The information pertaining to particular

individual or party or item in different dates are recorded under one

head identified by the name of the person, party or item concern, (also

called as account). Such a recording is called Posting in

Ledger.Ledger is also called as the Book of Final Entry.

3. Final Accounts:After recording and classification, a summary isdrafted to ascertain the position of the business. In this respect, Trial

balance, Trading& Profit and Loss a/c and Balance Sheet is prepared.

These documents together are termed as Final Accounts.

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What do you mean by AccountsAccounts denotes the date-wise record of all the dealings pertaining to a

particular person, party, property, goods, services, expenses, income, gains

and losses in one head at one place according to certain rules.

Types of Accounts

Natural

Person

Intangible AssetsTangible Assets

Artificial

Person

Representative

personReal

Accounts

Nominal

Accounts

Personal AccountsImpersonal Accounts

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JournalMeaning of Journal:

According to Rolland "Journal is the book oforiginal records in which a businessman enters all

his daily transactions, it shows which account is

debited and which one is credited.

According to L.C.CopperJournalis the book of

original record which is kept for the purpose of

sorting and classif ication of transactions, so that the

same may be conveniently recorded later on in theledger.

The process of recording the transaction in the

books of original records is calledjournal ising.

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a) The names of 2 accounts affected in the transaction are

written in two lines.

b) In the 1stline, account which is to be debited is written and

the abbreviation for debit Dr.is suffixed.

c) In the second line, the recording starts by leaving a little

space from the margin and than the account to be credited

is written and it begins with the word To.

d) Below the credit account in the next line a shortdescription, called as narration of the transaction is

written in the brackets starting with either Being or

For.

e) In the end after the narration a horizontal line in drawn inthe particulars to signify the end of the transaction.

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3. Ledger Folio (L.F.):Folio means page. Every transaction enteredin the journal is posting in the ledger. So in this column the number of

page of the ledger, wherein the transaction has been posted, is entered.

4. Debit Amount:This column carries the amount against the accountwhich has been debited.

5. Credit Amount:This column carries the amount against theaccount which has been credited.

Balancing of the JournalThe total of both the debit and the credit side of each page

is calculated and carried forward to the next page.

The balance at the end of the page is indicated by c/f

which means carried forwardOr by b/f as brought

forward.

The balance in the beginning of the next page is indicated

by b/dwhich means bought down.

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Rules Of Debit and Credit

Personal Account Real Account Nominal Account

Dr.

What comes in

Cr.

What goes out

Dr.

All expenses

& losses

Cr.

Al l incomes &

gains

Dr.

The receiver

Cr.

The giver

J l E i

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Journal EntriesJournalise the following transaction: -

1. 1stJan: Commenced business with cash Rs. 1,00,000/-, stock Rs. 5,000/-

and furniture Rs.13,000/-

2. 3rdJan: Goods purchased from Hari Rs.8,000/-

3. 5thJan: Sold goods to Narendra Rs.4,000/-

4. 6thJan:Goods for Rs.2,000/- bought from Hari was returned.

5. 7thJan: Sold goods to Zain for cash Rs.6,000/-

6. 9thJan: Goods worth Rs.1,000/- sold to Narendra were returned by him.

7. 10thJan: Paid salary to Ashok Rs.1,500/-

8. 11thJan: Rent paid in advance Rs.500/-

9. 12thJan: Paid to Hari Rs.5950/- in full settlement of his account.

10. 13th

Jan: Received cash from Narendra, after a discount of Rs100/-, infull settlement of his account.

11. 14thJan: Sunil, a debtor for Rs. 2,000/- was declared insolvent and only

45paise in a rupee could be recovered from his private estate.

12. 15thJan: Withdrew goods of Rs.300/- and cash Rs.500/- for private use.

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13. 18thJan: The salary for 3 months amounting to Rs.1,200/- is due ( not

yet paid)

14. 19thJan: Sold to Mohit goods worth Rs.5,000/- at 10% trade discount,

it was also decide to offer him a discount of 2% at the time of payment.The payment was made on 25thJan.

15. 20thJan: Goods worth Rs.300/- stolen by the employees, goods worth

Rs.500 was given as charity and goods worth Rs. 400/- distributed as

free samples.

16. 21stJan: Purchased Office equipments for Rs.8,000/-, Land Rs.15,000/-

and Machinery Rs.20,000/-

17. 31stJan: Depreciation on furniture @ 10%p.a.

18. Opened a current a/c with bank Rs. 2000

19. Received Interest in advance for three months Rs. 40020. Paid in wages by cheques Rs. 500

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The Financial ReportingEnvironment

GAAP

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Objective of financial reporting

To provide financial information about the reporting entity

that is useful to existing and potential investors, lenders and

other creditors in making decisions about buying, selling, orholding on to an investment in the shares of the entity, and

providing or settling loans and other forms of credit.

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Background to development of GAAP

Initially, most countries developed their own GAAP.

Globalisation and dual listings highlighted the need for a

globalised set of GAAP standards that could be used by all

countries.

Investors lacked useful financial information, so

accountants responded to the needs of the global investors

by initiating the development of unified accounting

standards.

The movement towards unified standards was motivated by

economic and market forces.

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GAAP standards

Currently two main sets of GAAP standards world-wide:International Financial Reporting Standards (IFRS), developed

by International Accounting Standards Board (IASB), and

US GAAP, developed and approved by the United States of

America's (US) Financial Accounting Standards Board (FASB)Through the current convergence processes between the IASB and

FASB, internationally we are approaching a critical juncture in the

path towards a single set of high-quality accounting standards.

All listed companies in South Africa have to comply with IFRS.

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Who develops IFRS?

International Accounting Standards Board (IASB)

Members from many different countries

IASB consults with:

Stock exchanges

Technical directors of audit firms

Preparers of financial statements

Users of financial statements

PROCESS IS VERY TRANSPARENT

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IFRS interpretations

International Financial Reporting Interpretations Committee

(IFRIC) issues interpretation guidelines.

IFRIC reviews both newly-identified financial reporting

issues not specifically addressed in IFRS and issues where

unsatisfactory or conflicting interpretations have developed.

IFRIC provides interpretative guidance with a view to

reaching consensus on the appropriate treatment of certain

aspects of specific IFRS.

The interpretations issued by the IFRIC are called IFRIC1,

IFRIC2, and so on (previously SIC1).

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Compliance with IFRS

Preparing financial statements in compliance with IFRS

In order for an entity to state that it has prepared its financial

statements in accordance with IFRS, the entity has to

comply with not only all of the standards but also all of the

interpretation standards.