Accounting Concepts:

 
1. Money Measurement
a. All transactions to be recorded in Financial Terms
b. Transaction/Influences which cannot be portrayed in financial terms are
ignored. E.g.: Elections, Lockdowns etc.
 
2. Entity Concept
a. FS is for the firm and not for the individuals
b. May/May not be a separate legal entity: Amazon India still accounted
under Amazon Inc.
 
3. Going Concern Concept:
a. Entity is expected to continue long after the individual
b. If not the scenario, all company assets and valued at current prices for
sales for potential buyers
c. 'Auditors give 'going concern qualification'
 
4. Accounting Period
a. For FS's calculated over a period of time, it needs to be defined
b. In India, it is the FY
c. Other countries may have different period
 
5. Consistency Concept
a. Once an accounting method is decided, it is expected to continue
b. If needs to be changed, it should be for a strong reason
c. Should be communicated to user
 
6. Materiality Concept
a. All relevant information must be communicated to users
b. In case events are insignificant, it can be merged with other events
c. How do you define what info is required?
i. Through judgment and common sense
 
7. Dual Aspect Concept
0. Assets cannot be created out of thin air
a. All transactions creates an impact on both sides of accounting equation
b. Impact on each side is equal
c. Changes in sides over a period of time b/w two BS's are shown in FS's such
as IS, SSE, SCF
 
8. Historic Cost Concept:
0. Cost of event at the time of occurrence of event is recorded
i. Assets are to be particularly be recoded this way
ii. Helps ignore differences in valuations
a. Useful for ignoring biases, and increasing reliability. For FA => Reliability >
Relevance
b. Not great for relevance as some entries might be decades old and the
value of assets might be much higher now
c. Some entries which can be valued today reliably through markets etc. can
be recorded on fair value. (Bond, Shares. Etc)
  
9. Conservatism Concept
0. When required, Assets will always be underestimated and Liabilities will
always be over estimated
a. Recognize revenues only when realized
b. Recognized expenses only when reasonably valued
 
10. Accrual Accounting
0. Most firms make F.S based on Accrual accounting
a. Focus on Economic impact rather than the cashflows
i. Not all inflows are revenues
ii. Not all outflows are expenses
b. Two fundamental principles:
i. Revenue recognition principle
i. Can recognize revenue only when
1. Earned by doing what was intended to be done
2. Is recognizable/realizable - Loans, shares etc.
 
11. Matching Principle / Expense Recognition
0. Product Cost
0. Directly associated with revenue when firm recognized revenue
a. Period Cost
0. Not directly associated with revenue : Admin staff, utilities etc.
12. 4 scenarios:
0. Payment for services is received before the event actually occurs
a. Payment for expense is done before the service actually occurs
b. Payment is received after the event actually occurs
c. Payment for expenses is done after expense event actually occurs
 
13. Scenario 1: Payment for services is received before the event actually occurs
 
T=0 - When payment is A + (Cash) = L + SE + (LDR>)
received

T=1 - When revenue event A + (Cash) = L + (SE> on account of increase in NI) + (LDR>)
happens
 
 
14. Scenario 2: Payment for expense is done before service occurs
 
T=0 - When payment is A - (Cash) + (DE) = L + SE
done

T=1 - When revenue event A - (Cash) + (DE>) = L + (SE< on account of NI reducing due
happens to expense )
 
a. Depreciation is a very crucial part of this scenario
b. Simplest way to calculate depreciation is through SLM
 
D = (Cost of PP&E - Salvage Value)/(Lifecycle)
  
c. Accumulated Depreciation - To track how long the machine is being used - Useful
for finding book value
i. It is shown as a contra asset - if it increases, assets reduce
 
 
d. Scenario 3: Payment is received after the event actually occurs
 
T=0 - When event actually A + (PR>) = L + (SE> on account of revenue being realized)
occurs

T=1 - When revenue event A + (Cash) + (PR>) = L + (SE> on account of increase in NI) +
happens (LDR>)
 
14. Scenario 4: Payment is made after the event actually occurs
 
T=0 - When event actually A = L + (SE<) + (Payment Payable)
occurs

T=1 - When revenue event A - (ash) = L + (SE<) + (Payment Payable<)

happens