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Basic Accounting Concepts and Conventions

Basic Accounting Concepts and Conventions

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Published by: pramod singh on Sep 29, 2010
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(Generally Accepted Accounting Principles)

What is GAAP? A set of standards generally accepted and universally practiced by accountants 1. Indicates how economic events are reported 2. Generated by the Financial Accounting Standards Board (FASB) and Securities & Exchange Commission (SEC)

These are the guidelines for measurement and presentation of accounting information and are used by professional accountants in preparing accounting information and reports . These standards are known as Generally Accepted Accounting Principles (GAAP). and provide the general framework for determining what information is included in the financial statements and how this information is to be presented. these principles reflect the needs of the society and not those of the accountants or any other single constituency.FUNDAMENTAL ACCOUNTING CONCEPTS AND ASSUMPTIONS  Externally communicated accounting information must be prepared in accordance with accounting standards that are understood by both the senders and the users of the information. Since accounting is a service activity.

There are 12 general accounting principles:             The Money Measurement Entity Going concern Cost Dual aspect Accounting period Conservatism Realization Matching Consistency Materiality Objectivity .

 As you see this concept imposes a severe limitation on the scope of accounting. cars worth Rs 1 crore and trucks worth¶s 2 crores would make it easier for one to add up these items by adding their monetary values. It is impossible for the accounting to record or report the health of the key people in the organization or the plant that is not working or the labor is going on strike or that the key people are leaving the organization and other important factors that may have a direct bearing on the future .  Expressing these items in monetary terms by saying that one has buildings worthRs15 crores. fifty cars. boilers worth Rs 50 lac. five boilers. you cannot add them together simply like that and get to know what the business is worth. We may not be able to add apples and oranges directly but we can add them easily by expressing them in their monetary terms. thirty trucks.The Money Measurement Concept:  Record should be made of that information that can be expressed in monetary terms  Although the business may own seven buildings.  So the money provides a common denominator by which the resources and other factors about the business entity can be expressed and valued. Expressing in monetary terms also helps in understanding the changes their impact on the value of the resources.

.Entity Concept:  Accounts can only be kept for entities which are different from the persons who are associated with these entities.

The Going Concern Concept:  Accounting records. events and transactions on the assumption that the entity will continue to operate for an indefinitely long period of time. .

 This does not mean that the asset will always be shown at the cost price. .  This is applicable to fixed assets and not the current assets.The Cost Concept:  Assets are always shown at their cost price rather than their market price  Every transaction must be recorded at its acquisition price. It means that the asset is recorded at its cost price and is systematically reduced or increases in value by charging depreciation/appreciation.

Dual Aspect Concept  The value of the assets owned by the company is equal to the claims on these assets.  This is the basic concept of accounting.  Every Dr entry has its corresponding Cr entry.  This concept can be expressed as ASSETS = CAPITAL + LIABILITIES .

 At the end of each period an income statement and balance sheet are prepared for finding the profit and loss and financial position of the business as on the last day of the accounting period. usually a year.Accounting Period Concept  Accounting measures activity for a specified interval of time. .

Matching Concept  Matching means appropriate association of related revenues and expenses.  The profit of the business is ascertained only when the revenue earned during a particular period is compared with the expenditure incurred for earning that particular revenue. .

.Realization Concept  The sale is considered to have taken place only when either the cash is received or some third party becomes legally liable to pay the amount .  According to this concept only those transactions are recorded in accounting which have actually taken place and not the ones that will take place in the future.

ACCOUNTING CONVENTIONS  Conservatism  Consistency  Materiality  Full Disclosure .

 The idea behind this concept is that the  -recognize revenues only when they are reasonably certain  .Recognize expenses as soon as they are reasonably possible .Conservatism  Anticipate the profits but provide for all losses.

.Consistency  According to this convention whatever principle or method is adopted for recording in the books should remain unchanged from one period to another.

.Materiality  Insignificant events would not be recorded if the benefit of recording them does not justify the cost.

the accounts should be prepared honestly all the relevant information should be disclosed .Full Disclosures  According to this concept .

Accounting standards attempt to harmonize diverse accounting treatments. set out systematically) the generally accepted accounting principles .  Accounting standards codify (that is.ACCOUNTING STANDARDS  The purpose of accounting standards is to prescribe a standard solution or reduce the alternative permissible solutions to such accounting issues.

Concept Standard .Disclosure Standard .ACCOUNTING STANDARDS  There are four accounting standards .Policy Standard .Measurement Standard .

 For example .MEASUREMENT STANDARD  This standard provides guidance for accounting valuation. how an asset or a liability be valued. .

POLICY STANDARD  This standard prescribes the accounting treatment of an accounting issue.an accounting treatment for research and development .  For example .

DISCLOSURE STANDARD  Disclosure means providing supplementary information to make the financial statements more meaning ful. .  For example. segmental reporting and related party disclosures.

CONCEPT STANDARDS  This type standard of standard does not address any specific accounting policy. .  For example. standard about fundamental accounting assumptions or the criteria for choice of accounting policies.

practices.Contd. modifying principles.  The above mentioned principles. policies and standards are regularly followed while preparing the income statements. .

accounting standards issued by the ICAI shall be deemed to be the accounting standards.Accounting Standards  Until the Central Government prescribes accounting standards.  AS5(Revised) Net Profit and loss for the period.  Accounting Standards Issued by ICAI: The Accounting Standards issued by the Council of the Institute of Chartered Accountants of India (lCAI) up to January 2004 are listed below:   Number of the Accounting Standards Title of the Accounting Standards  AS1 Disclosure of accounting policies  AS2 (Revised) Valuation of Inventories  AS3(Revised) Cash Flow Statements  AS4(Revised) Contingencies and events occurring after the balance  Sheet date.  AS6(Revised) Depreciation accounting  AS 7 Accounting for construction contracts. . prior period items  And changes in accounting policies.

Accounting for Accounting for Accounting for Accounting for Statements of Employees Borrowing costs . AS 8 and development  AS 9  AS 10 assets  AS11 changes in Foreign   AS 12 government grants  AS 13 investments  AS 14 Amalgamations  AS 15 Retirement Benefits in the financial   AS 16  Accounting for research Revenue Recognition Accounting for fixed Accounting for effects in Exchange rates.

Accounting Standards AS 17 AS 18 Impairment of ASSETS AS 29 AS 19 AS 20 AS 21 Statements  AS 22 income  AS 23 Investment in Associates in Consolidated   AS 24  AS 25 Reporting  AS 26  AS 27 Interest in joint ventures  AS 28 Assets       Segment Reporting Related party disclosures Leases Earnings per share Consolidated Financial Accounting for taxes on Accounting for Financial Statements. Discontinuing operations Interim Financial Intangible assets Financial Reporting of .

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