By-

Raghu Ram Raju

 ACCOUNTING CONCEPTS :
 Business Entity Concept.
 Conservatism Concept.
 Money Measurement Concept.
 Accrual Concept.
 Periodicity (or) Accounting Period Concept.
 Matching Concept.
 Consistency Concept.
 Going Concern Concept.
 Cost Concept.
 Dual Aspect.
 Materiality Concept.
 BUSINESS ENTITY CONCEPT :
Every transaction in the
business should be recorded according to business but not as per the
owner.
As per this concept capital and drawings are recorded in the
books of accounts.

 CONSERVATISM CONCEPT :
Every business should record all
anticipated losses but not gains. Anticipated gain should be recorded
as and when they are realized.
As per this concept closing stock is to
be valued at cost or net realizable value (NRV) whichever is lower. All
provisions are recorded as per this concept.
 MONEY MEASUREMENT CONCEPT :
The transactions
which can be measured in terms of money will be recorded in the
books of accounts as per money measurement concept.
As per this concept quantitative transactions
should be recorded but not qualitative transactions.

 ACCRUAL CONCEPT :
All the books of accounts are to be
prepared on the basis of mercantile system of accounting i.e. Accrual
concept. Payment is irrelevant for recording in the books of accounts
the criteria is to be seen for regarding in the books is whether the
expense or income accrued. If the expense or income is accrued it
should be recorded in the books of accounts. For example Gopal is a
person who worked for 8 months and salary paid to him during the
year is 6 months salary. Now in the books of accounts we have to
record salary for 8 months as per accrual concept.
 PERIODICITY (OR) ACCOUNTING PERIOD CONCEPT :
The business will be artificially split into
periodic intervals in order to ascertain profit or loss for that period.
As per this concept Trading and Profit &
Loss a/c’s are prepared.

 MATCHING CONCEPT :
All expenses should match with their
revenue. Depreciation is recorded in the books of accounts as per
matching concept.

 CONSISTENCY CONCEPT :
The method adopted by the
financial statements should be followed consistently year after year in
order to compare financial statements.
 If the management wants to change the method
it satisfy any of the following conditions :
 For Compliance with Law.
 For Compliance with Accounting Standard.
 For better presentation of Financial Statements.

 GOING CONCERN :
The business will not close in the
foreseeable future. If the business knows that the next financial year
there is no trading activities that the business is closed down then all the
assets in Balance Sheet should be recorded at NRV not cost value.

 COST CONCEPT :
All assets should be recorded at their
historical cost.
 DUAL ASPECT :
For every transaction there will be a debit and
corresponding credit.

ASSET = CAPITAL + LIABILITIES

 MATERIALITY CONCEPT :
The items which are materiality to
the business should be recorded in the books of accounts as per this
concept small petty expenses can be classified as miscellaneous
expenses and amounts can be rounded off to the nearest rupee,
hundreds, thousands based on the turnover.
Full disclosure concept is exception for materiality concept.
EXPENDITURE :

EXPENDITURE

CAPITAL REVENUE
EXPENDITURE EXPENDITURE
 CAPITAL EXPENDITURE :
Capital expenditures are for fixed
assets, which are expected to be productive assets for a long period of
time.

 REVENUE EXPENDITURE :
Revenue expenditures are for costs
that are related to specific revenue transactions or operating periods,
such as the cost of goods sold or repairs and maintenance expense.

Thus, the differences between these two types of expenditures are as

follows:
DIFFERENCE BETWEEN CAPITAL AND REVENUE
EXPENDITURES :

SCOPE CAPITAL REVENUE

EXPENDITURE EXPENDITURE
Timing Capital expenditures are Revenue expenditures are
charged to expense charged to expense in the
gradually via depreciation, current period, or shortly
and over a long period of thereafter.
time.
Consumption A capital expenditure is A revenue expenditure is
assumed to be consumed assumed to be consumed
over the useful life of the within a very short period
related fixed asset. of time.
Size Capital expenditures tend Revenue expenditure
to involve larger monetary involves lesser monetary
amounts. amounts than capital
expenditure.
 MEANING & SCOPE OF ACCOUNTING :
“Accounting is the art of recording, classifying, and summarising in
a significant manner and in terms of money, transactions and events which are, in part
at least, of a financial character, and interpreting the result thereof.”
As per this definition, accounting is simply an art of record keeping.
The process of accounting starts by first identifying the events and transactions which
are of financial character and then be recorded in the books of account. This
recording is done in Journal or subsidiary books, also known as primary books.
Every good record keeping system includes suitable classification of transactions and
events as well as their summarisation for ready reference. After the transactions and
events are recorded, they are transferred to secondary books i.e. Ledger. In ledger
transactions and events are classified in terms of income, expense, assets and
liabilities according to their characteristics and summarised in profit & loss account
and balance sheet. Essentially the transactions and events are to be measured in terms
of money. Measurement in terms of money means measuring at the ruling currency
of a country, for example, rupee in India, dollar in U.S.A. and like. The transactions
and events must have at least in part, financial characteristics. The inauguration of a
new branch of a bank is an event without having financial character, while the
business disposed of by the branch is an event having financial character. Accounting
also interprets the recorded, classified and summarised transactions and events.
 PROCEDURAL ASPECTS OF ACCOUNTING :
On the basis of the above definitions, procedure of accounting
can be basically divided into two parts:
(i) Generating financial information and
(ii) Using the financial information.
The procedural aspects of accounting can be explained with
the help of the following chart :
 USERS OF FINANCIAL INFORMATION :
 ACCOUNTING OBJECTIVES :
 Systematic recording of transactions.
 Ascertainment of results of the recorded transactions.
 Ascertainment of financial position of business.
 Providing information to the users.
 To know the solvency position of the business.

 QUALITATIVE CHARECTERISTICS OF FINANCIAL

STATEMENTS :
 Understandability.
 Relevance.
 Reliability.
 Comparability.
 Materiality.
 Substance overform.
 Neutrality.
 Prudence.
 Full fair & adequate disclosure.
 Completeness.

 SUBSTANCE OVERFORM :
The transaction should be
recorded in the books as per their substance i.e. Actual but not nearly
by the legal form.
Ex:
If a company fails to file sales tax on the due date. For this type of
mistake there is a penalty of $ 2cr in the act but after proceedings the
sales tax dept. charged $ 1cr . Now by substance overform we have to
record penalty as $ 1cr but not $ 2cr.