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To provide information useful


for making investment and
lending decisions
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i f every accountant used his or her own rules for


recording transactions, the financial statements would
be useless in making comparisons.
i Therefore, accountants have agreed to apply a common
set of measurement principles (a common language) to
record information for financial statements.
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The rules that govern accounting are called GAAP
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i GAAP - a term that applies to the broad


concepts or guidelines and detailed practices in
accounting, including all the conventions,
rules, and procedures that make up accepted
accounting practice at a given time
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÷Accounting principles are the rules of action or the
methods and procedures of accounting commonly
adopted while recording business transactions.´

Accounting principles are general decision rules,


derived from objectives and concepts of
accounting which govern the development of
accounting techniques.
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Accounting principles are classified into


two parts.
(A) Accounting concepts.
(B) Accounting conventions.
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Accounting Accounting
concepts conventions
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These are basic assumptions or fundamental


proposition concerning the economic,
political and sociological environment in
which accounting must operate.
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R. Business entity concept
2. Going concern concept
3. Money measurement concept
4. Double entry concept
5. Accounting period concept
6. Cost concept
7. Realization concept
8. Matching of cost & Revenue
concept
9. Accrual concept
R . The Reliability Concept
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R. Convention of Full disclosure


2. Convention of conservatism
3. Convention of consistency
4. Convention of Materiality
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• t is helpful in keeping business affairs strictly free
from the effect of private affairs of the proprietor(s).
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•Amount invested by proprietor is shown as a
÷liability´ in the books of the business.
•Amount paid for personal expenses of proprietor
are shown as drawings from capital of the
proprietor.
• t is applicable to all forms of business
organisations
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iAssume that John decides to open up a gas


station and coffee shop.
iThe gas station made Rs 25 , in profits,
while the coffee shop lost Rs 5 , .
iow much money did John make?
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The entity will continue to operate in the forseeable


future.
  

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Accordingly:
ig* assets are recorded 
 
not liquidation value.
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  on fixed assets is charged over the
expected lives.
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 are amortized over appropriate period
i   *  as treated as assets.
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i f the continuity of an entity is in doubt, a


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is taken, and the assets and liabilities are


valued as if the entity were to be liquidated
in the near future.
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Money is the    


 for
quantifying the effects of transactions.
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•²vents or transactions which 


be
expressed in money do not find place in the
books of account though they may be very
useful for the business.
•This concept helps in understanding the state
of affairs of the business in a much better way.
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²ach transaction has two aspects:
a) Receiving of a benefit
b) The giving of that benefit
The recognition of the two aspects to every
transaction is known as a dual aspect
analysis.
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There must be a % 
 to have a complete
record of each business transaction.
An entry being made in the receiving account (debit)
and an entry of the same amount in the giving account
(credit).



  

 

    
  

    
 
  





 

   
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t follows from the dual aspect concept that at any time:


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This relationship is called ÷ 


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The life of the business is divided into
appropriate segments (accounting periods) for
studying the results shown by the business
after each segment.
t requires that accounting information be reported
at regular intervals (accounting periods).
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Accounting period is a period to measure business


performance.
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Accounting period is the span of time
at the end of which financial statements are prepared
to throw light on
the results of operation during the relevant period and

the financial position at the end of the relevant


period.
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 ) Though the life of the business is
considered to be indefinite (according to going
concern concept), the measurement of income and
studying of the financial position of the business
after a very long period would not be helpful in
taking proper corrective steps at the appropriate
time.
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Assets and liabilities should be recorded at


historical cost i.e. costs as on acquisition.
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This cost is the basis for all subsequent accounting


for the assets.

This does not mean the the assets will always be


shown at cost. t may be 

   

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 ) This concept brings %0 

 in the
preparation and presentation of financial statements.
 

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i t distorts the true worth of an asset by sticking to its
original cost.
iFinancial statements become irrelevant in case of inflation
iRemoves cost of fixed assets by writing off their cost while
asset may be in good condition
iAssets for which no payment has been made are not shown
e.g knowledge ,skill of uman Resources.
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The revenue principle governs two things:

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When to record revenue and«

the amount of revenue to record.


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t deals with the determination of the point of time


when revenues are earned
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iTo be recognized, revenue must be:


± - goods are delivered or a service is
performed
± 1 - cash or a claim to cash (credit) is
received in exchange for goods or services
iRevenue does not have to be received in cash.
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• When the seller of goods has transferred to the


buyer property (ownership ) in the goods, for a price
and the buyer becomes legally liable to pay.

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•When service has been rendered.
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• When no uncertainty exists as to its measurability


and collectability.
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t is the basis for recording
expenses and includes two steps:

i dentify all the expenses incurred during the


accounting period.
iMeasure the expenses and match expenses
against revenues earned.
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Revenue ± ²xpense = Net income


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Revenue ± ²xpense = (Net loss)


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The determination of profit of a particular


accounting period is essentially a process
of matching the revenue recognized during
the period and the expenses incurred
during the same period to obtain the
revenue.
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Revenue is total amount realised from
sale of goods or
provision of services
earnings from interest, dividend and other
items of income.

²xpenses are costs incurred in connection


with the earning of revenues.
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{Matching concept is based on  



  
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{ën account of matching concept,
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 are made for all prepaid expenses
outstanding expenses, accrued incomes while
preparing financial statements.
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ncomes and expenses should be recognised as


and when they are earned and incurred,
irrespective of whether the money is received or
paid for it.
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   is recognised when it is realised, i.e. when sale


is complete or services are given irrespective of whether
cash is received or not.
Similarly *   are recognised when assets or
benefits are used rather than when they are paid for and
in the accounting period in which they help in earning
the revenue whether cash is paid or not.
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©This concept is used by  businesses that disclose their


financial statements to various interestsed parties.
©The    
, R956 provides that accrual concept
has to be maintained for practically all accounting
purposes.
©The law in ndia provides that in cases where accrual
concept 
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% may be followed.
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7-The quality of information that


assures decision makers that the information
captures the conditions or events it purports to
represent.
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•Reliable data are supported by convincing


evidence that can be verified by independent
parties.
•The impact of events should be measured in
a systematic, reliable manner.
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nformation must
nformation must
be reasonably
be free from bias.
accurate.

nformation must ndividuals would


report what arrive at similar
actually conclusions using
happened. same data.
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²ntries in accounting records and data reported
in financial statements must be based on
objectively determined evidence so as to be
reliable.
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ëbjectively determined evidence includes:


iinvoices and vouchers for purchase and sale,
ibank statement for amount of cash at bank,
iphysical checking of stock in hand.
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Without this concept users of financial
statements would not have confidence in them.
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Accounting reports should disclose fully and
fairly the information they purport to represent.
Significant information should be disclosed in financial
statements.
Such disclosures can also be made through
footnotes.eg.about
icontingent liabilities
iMarket value of investmetns
iThe basis of valution of fixed assets, investments
and stock.
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Financial statements should be honestly prepared


and sufficiently disclose information which is of
material interest to proprietors, present and
potential creditors and investors.
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Prudence is the ÷inclusion of a degree of
caution in the exercise of judgement needed
in making the estimates required under
conditions of uncertainty, such that assets or
income are not overstated and liabilities or
expenses are not under stated.´
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iPolicy of µcaution¶ & µplaying safe¶
iPolicy of safeguarding against possible losses in
world of uncertainty
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iAnticipated losses are shown in the form of
provisions.
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As a result of this convention :
© Revenues and gains are recognized only when
realized in form of cash or assets the ultimate
cash realization of which can be assessed with
reasonable certainty.
© Provisions must be made for all known
liabilities, expenses and actual and probable
losses.eg. Provision for doubtful debts is made
© Closing stock is valued at lower of cost and
market price.
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This convention requires that once a firm has


decided on certain accounting policies and
methods and has used these for some time, it
should continue to follow the same methods or
procedures for all subsequent similar events
and transactions unless it has a sound reason to
do otherwise.
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iThe comparison of one accounting period with


that in the past is possible.

i²liminates personal bias.


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Consistency does 
forbid introduction of
improved accounting
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The effect of the change (&
 
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" &   of profit as compared
to the previous period) must be clearly
stated in the financial statements by way of
a note.
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Consistency also implies *


  
 i.e.
the financial statements of one enterprise should
be comparable with another

²very enterprise should follow same accounting


methods and procedures of recording and
reporting business transactions.
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A financial statement item is material:

iif there is reason to believe that knowledge


of it would influence the decision of the
informed investor.(AAA)

iif its omission or misstatement would tend


to mislead the reader of the financial
statements under consideration.
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Deciding what constitutes a material detail is left to the
discretion of the accountant.
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  ± what is material to one
company might not be material to another company.
i   - An item may be material for one purpose
while immaterial for another.
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  - Materiality may or may not
depend upon amount.
i 
 4 only round figures may be shown in
financial statements to make figures manageable
without affecting accuracy.