Accounting: The Language

of Business

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 Course Outline
• Meaning of Accounting Principles
• Meaning of Accounting Concepts
• Explain various Accounting Principles

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 Learning Objectives
• To define Accounting Principles
• To define Accounting Concepts
• To understand various Accounting Principles

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 Introduction
Accounting - a process of identifying, recording,
summarizing, and reporting economic information
to decision makers in the form of financial
statements
Financial accounting - focuses on the specific needs
of decision makers external to the organization, such
as stockholders, suppliers, banks, and government
agencies
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 The Nature of Accounting

The accounting system is a series of steps

performed to analyze, record, quantify,
accumulate, summarize, classify, report, and
interpret economic events and their effects on an
organization and to prepare the financial
statements.

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 The Nature of Accounting
Accounting systems are designed to meet the
needs of the decisions makers who use the
financial information.
Every business has some sort of accounting
system.
These accounting systems may be very complex or
very simple, but the real value of any accounting
system lies in the information that the system
provides.

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 Accounting as an Aid to
Decision Making
Accounting information is useful to anyone who
makes decisions that have economic results.
•Managers want to know if a new product will be
profitable.
•Owners want to know which employees are productive.
•Investors want to know if a company is a good
investment.
•Creditors want to know if they should extend credit,
how much to extend, and for how long.
•Government regulators want to know if financial
statements conform to requirements.
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 Accounting as an Aid to
Decision Making
Fundamental relationships in the decision-
making process:

Accountant’s
Financial
Event analysis & Users
Statements
recording

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 Users of Accounting Information

Accounting

Financial Accounting
Accounting Analysis

Used for reporting Providing information for

planning and control

Audience: Outside World Audience: Internal

(Govt. Bodies, society, etc.) (Managers and investors)

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 Accounting Concepts and
Principles
Actually there are a number of accounting concepts
and principles based on which we prepare our
accounts
These generally accepted accounting principles lay
down accepted assumptions and guidelines and are
commonly referred to as accounting concepts

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 Accounting Concepts and
Conventions
Accounting Concepts Accounting Conventions
•Business entity
•Money Measurement
•Full Disclosure
•Dual Aspect •Conservatism
•Going Concern •Materiality
•Accounting Period •Consistency
•Cost Concept
•Matching Concept
•Realization

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 Business Entity
Meaning
•The business and its owner(s) are two separate
existence entity
•Any private and personal incomes and expenses of the
owner(s) should not be treated as the incomes and
expenses of the business

Money Measurement
Meaning
•All transactions of the business are recorded in terms of
money
•It provides a common unit of measurement
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 Dual Aspect Concept
Meaning
This is the most basic concept of accounting. According to this concept, every
business transaction has a dual effect i.e. “for every debit, there is an equal
credit.”
Accounting equation, “Assets = Liabilities + Capital” is based on this concept.

Going Concern
Meaning
•The business will continue in operational existence for the
foreseeable future
•Financial statements should be prepared on a going concern
basis unless management either intends to liquidate the
enterprise or to cease trading, or has no realistic alternative
but to do so

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 Accounting Period Concept
Meaning
This concept is a result the assumption of Going Concern Concept. According to
going concern concept, business will continue for a long time, it will be very
difficult to measure the income and analyse of financial position of the business
after a very long period and would not be helpful in taking corrective action
when it is actually required.
This concept divides the life of business into periodic intervals which are known
as Accounting Period. This period is normally of twelve months starting on 1st
April and ends on 31st March of next calendar year. At the end of each
accounting period final accounts including Income Statements and Balance
Sheet are prepared to find out the profit and loss for the accounting period and
financial position at the end of the period.

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 Cost Concept
Meaning
Assets should be shown on the balance sheet at the cost of purchase
instead of current value

Accruals/Matching Concept
Meaning
•Revenues are recognized when they are earned, but not when cash is
received
•Expenses are recognized as they are incurred, but not when cash is paid
•The net income for the period is determined by subtracting expenses
incurred from revenues earned

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 Realization Concept
Meaning
•Revenues should be recognized when the major economic activities have been
completed
•Sales are recognized when the goods are sold and delivered to customers or
services are rendered

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 Accounting Conventions
Convention of Full Disclosure
Meaning
•Financial statements should be prepared to reflect a true and fair view of
the financial position and performance of the enterprise
•All material and relevant information must be disclosed in the financial
statements

Convention of Materiality
Meaning
•Immaterial amounts may be aggregated with the amounts of a similar
nature or function and need not be presented separately
•Materiality depends on the size and nature of the item

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 Accounting Conventions
Convention of Prudence/Conservatism
Meaning
•Revenues and profits are not anticipated. Only realized profits with
reasonable certainty are recognized in the profit and loss account
•However, provision is made for all known expenses and losses whether
the amount is known for certain or just an estimation
•This treatment minimizes the reported profits and the valuation of assets

Convention of Consistency
Meaning
•Companies should choose the most suitable accounting methods and
treatments, and consistently apply them in every period
•Changes are permitted only when the new method is considered better
and can reflect the true and fair view of the financial position of the
company
•The change and its effect on profits should be disclosed in the financial
statements

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 Learning Outcomes
• Students are able to explain and interpret Accounting Principles
• Students are able to explain and interpret Accounting Concepts

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