ACCOUNTING
CONCEPTS
GRADE XI CHAPTER NO 3
GOING CONCERN CONCEPT
BUSINESS PRESUMES THAT IT WILL CONTINUE BUSINESS FOR A LONGER PERIOD OF TIME.
IT DOES NOT WANT TO SHUTDOWN ITS OPERATIONS.
CAPITAL EXPENDITURE –ANY EXPENDITURE DONE ON FIXED ASSETS eg: Machinery, furniture
etc. Benefit for more than one year./longer period
REVENUE EXPENDITURE-Any expenditure done for maintenance purpose eg: Repairs of
Machinery. Benefit get exhausted within a year.
FIXED ASSETS are recorded at Historical cost/original cost .ignore market value .they are
depreciated over the years till its useful life of an assets.
ACCOUNTING ENTITY
CONCEPT/BUSINESS ENTITY CONCEPT
EVERY BUSINESS NEEDS TO RECORD TRANSACTIONS FROM FIRM POINT OF VIEW
OWNER IS TREATED SEPERATELY FROM THE BUSINESS IT MEANS THAT OWNER’S PERSONAL
TRANSACTION HAS TO BE KEPT SEPARATE.
CAPITAL – WHEN OWNER INVEST HIS OWN PERSONAL MONEY INTO THE BUSINESS
DRAWING- WHEN OWNER IS WITHDRAWING FOR PERSONAL USE –CASH/GOODS.
MONEY MEASUREMENT CONCEPT
-ALL TRANSACTIONS WHICH CAN BE MEASURED IN TERMS OF MONEY
LIMITATIONS OF THE CONCEPT
-IGNORE MARKET VALUE – MONEY IS DYNAMIC BUT WE IGNORE IT
IGNORES QUALITITATIVE ASPECT – Eg: Quality of staff. Take into consideration only quantitative
aspect.
Accounting period concept/periodicity
Every business is broken into smaller periods-Eg:01.04.21 to 31.03.22
Advantages- helps in determining correct profit/loss
To know the true financial performance of the company.
Users of accounting information they want to know how company is progressing eg: banks,
creditors etc.
Complete or full disclosure concept
Good accounting practices where all material information is fully disclosed by the firm.
Legal rules applicable according to the companies Act.
Disclosed all the information in notes to account in their balance sheet.-Joint stock company.
REVENUE RECOGNITION/REALISATION
CONCEPT
WE SHOULD RECORD TRANSACTION ON THE DAY WHEN REVENUE IS RECOGNISED .
LEGAL OBLIGATION IF ARISES WE HAVE TO RECORD ON THE SAME DAY.
Eg: FIRM IS SELLING GOODS ON FEBRUARY 2020 AND RECEIVED AMOUNT IN MONTH OF APRIL
2020
FIRM WILL RECORD IN MONTH OF FEBRUARY 2020 AS LEGAL OBLIGATION HAS ARISED IN
MONTH OF FEB.
EG: ADVANCE OF RS 5000 IN MONTH OF FEB 2020 BUT GOODS ARE GOING TO BE SOLD IN
MONTH OF MAY 2020.ANS= MAY 2020
REVENUE IS RECOGNISED WHEN IT IS EARNED ,WHETHER RECEIVED OR NOT.
VERIFIABLE OBJECTIVE (EVIDENCE)
CONCEPT
TRANSACTIONS ARE RECORDED ON BASIS OF VOUCHERS eg: Bills/credit note/debit note.
SOURCE OF EVIDENCE OF FIRM IN CASE ANY LEGAL DISPUTE ARISES
IT SHOWS CORRECTNESS OF INFORMATION ANY EXPENSE ,SALES,PURCHASE ETC.
IT IS FREE FROM ANY PERSONAL BIAS.
IT HELPS IN AUDITING AT THE END OF YEAR
MATCHING CONCEPT/MATCHING
PRINCIPLE
PROFIT/LOSS=REVENUE &EXPENSE (PROFIT AND LOSS A/C)
IF REVENUE IS RECOGNISED ALL RELATED EXPENSES AND INCOME IT SHOULD BE ACCOUNTED ,WHETHER PAID OR NOT.
EG: ELECTRICITY BILL 50,000 (01.04.21-31.03.22)
CASH PAID FOR ELECTRICITY 30,000(C.Y)
O/S IS 20,000 ELECTRICITY (LIABILITIES IN B/S) (CURRENT YEAR)(+)
NEXT YEAR 20000 (-)
ANS=50,000 (30,000 +20,000 O/S)
Eg: ELECTRICITY BILL 50,000 (01.04.21-31.03.22)
PAID 70,000 (CASH)
PREPAID EXPENSE 20,000 (ASSETS IN B/S)(CURRENT YEAR)(-). NEXT YEAR 20000(+)
P/L A/C= 70000-20000=50000
MATCHING CONCEPT
O/S EXPENSE – ADD – P/L A/C LIABILITY- B/S
O/S INCOME – ADD – P/L A/C ASSETS – B/S
PREPAID EXPENSE – LESS P/L A/C ASSETS – B/S
PRE-RECEIVED INCOME- LESS P/LA /C LIABILITY – B/S
All expenses are matched against revenue to determine correct profit/loss.
Expenses/revenue which are of current year should be recorded at current year only.
HISTORICAL COST CONCEPT
ALL FIXED ASSETS ARE RECORDED AT ORIGINAL COST – PRICE AT WHICH IT IS PURCHASED.
ASSETS ARE DEPRECIATED OVER THE YEARS AND WE IGNORE MARKET VALUE OF THE
CONCERNED ASSETS.
For eg: 4,00,000 COST OF MACHINE FOR 5 YEARS DEP OF RS 50,000 EACH YEAR
1ST YEAR- 4,00,000 EVEN IF MARKET VALUE IS 7,00,000
FOR 5 YEARS DEP AMOUNT IS 2,50,000
VALUE OF MY ASSETS = 4,00,000-2,50,000=1,50,000
ACCRUAL CONCEPT
It is based on the concept that transactions are recorded as and when they occur. In
other words, businesses that follow the accrual basis of accounting need to record
revenues and expenses when a transaction occurs regardless of when payment for the
same is received or made.
Accrual basis of accounting follows the matching principle, which states that expenses
and revenues should be recognised in the same accounting period.
Accrual basis of accounting is the preferred choice of accounting for large businesses
and those businesses that deal mostly in credit.
The general concept of accrual basis of accounting is that the financial transactions are
recognised by matching of the revenue to the expenses when a transaction occurs
instead of when the payment for the same is made or received.
DUAL ASPECT CONCEPT
EVERY MONETARY TRANSACTIONS – DEBIT AND CREDIT
DOUBLE ENTRY SYSTEM OF BOOK KEEPING.
ASSETS= LIABILITIES + CAPITAL
FUNDAMENTAL ACCOUNTING EQUATION
MR X IS BRINGING 5,00,000 INTO THE BUSINESS
CASH –ASSETS 5,00,000
CAPITAL-INTERNAL LIABILITY-5,00,000
MATERIALITY CONCEPT
WE SHOULD RECORD THOSE TRANSACTIONS WHICH ARE MATERIAL OR RELATED TO OUR
BUSINESS .
IT VARIES FROM ONE BUSINESS TO ANOTHER.
Eg:Repair of building 1,00,000 any business which is having turnover of Rs 15,00,000 it matters
for them.
business which is having turnover of Rs 150,00,000 it DO NOT matters for them.IT CAN BE
MERGED WITH OTHER EXPENSE.
CONSISTENCY CONCEPT
PRACTICES WHICH ARE ADOPTED BY THE COMPANY SHOULD BE CONSISTENT OVER THE YEARS .
IF FOR Eg: Depreciation company is charging on Straight line method this year it should follow
same for next year also.
Comparison will be come difficult.
True profit/loss cannot be determined.
Conservatism concept/Prudence
Company should assume for all possible losses but not profit
But should provide for all possible losses.
Eg: Debtors when they fail to pay money it is called bad debt.
Provision for bad debt A/c-out of profit and will accumulate money in this account.
Provision for discount a/c
Closing stock are always to be recorded at lowest price (C.P ,M.P)
IT WILL NOT REFLECT TRUE PICTURE .DO YOU THINK IT IS WORKING AGAINST CONCEPT OF FULL
DISCLOSURE
TIMELINESS
EVERY ACCOUNTING INFORMATION SHOULD BE TIMELY RECORDED
IT IS AVAILABLE TO THE USERS AT THE CORRECT TIME
FINANCIAL YEAR CLOSES 31.03.22 EVERY YEAR
CORRECTIVE ACTIONS/TIMELY ACTION CAN BE TAKEN.
INDUSTRY PRACTICES
THE RULES FOLLWED BY ONE COMPANY SHOULD BE FOLLOWED BY OTHER COMPANY OF SAME
INDUSTRY SO THAT UNIFORMITY AND COMPARISON IS POSSIBLE.
SUBSTANCE OVER LEGAL
FORM
Substance over form concept does not want us to break the law or regulation but must
ensure the true nature of transaction is taken into account. The company must measure
the economic impact of the event instead of the legal form. The principle is to make sure
that financial information true and faithful representation so the reader will fully
understand. They are not missing any pieces of information which can impact their
decision.
