Accounting concepts,

conventions and
principles
 Meaning of generally accepted
accounting principles

• GAAP may be defined as those rules of

actions or conduct which are derived from
experience and practice and when they
prove useful, they become accepted
principals of accounting.
 Features of accounting principles
 Relevance or usefulness:
- Satisfies the needs of those who use it.
- Able to provide useful information
 Objectivity :
- Based on facts and figures
- No scope for personal bias
 Feasibility :
- Principles should be practicable
- Easy to use otherwise their utility will be
limited
 (GAAP)
 The very basic objective of accounting is to
provide financial information to various interested
groups for the purpose of decision making.

 It is of utmost importance that uniformity and

consistency is maintained in preparing such
financial statements.

 If business enterprises are left to have their own

notion about the accounting terms like assets,
liabilities, revenue, income and expense etc. it will
lead to utter chaos and confusion.

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 GAAP

• Accounting being a man made system, must evolve

and adjust itself to the changes in the needs of
mankind.

• As a result, accounting principles are not as exact and

rigid as are the laws of natural sciences. Therefore,
emphasis is on general, instead of universal,
acceptability of accounting principles.

• The GAAP are the building blocks of the accounting

language. Rather, they are the pillars on which the
structure of accounting is basically resting.
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Classification of Accounting Principles

Accounting
Principles

Convention
Concepts
s
 Accounting Concepts

Concept
These are the assumptions on the basis of
which financial statements are prepared.
Concepts are the idea or thought which has
universal application.
Conventions
These are derived by usage and practice.
conventions need not have universal
application.

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 Concepts
1. Business Entity Concept:
o Business considered to be distinct from its owners-proprietors,

partners or members.

o Considered as two distinct and separate entities.

o Transaction has to be recorded from point of view of business and

not owners.

o Cash contributed by the proprietor, for example, adds to the

cash resources of the business and hence, is debited to Cash

account, though it reduces the cash resources of the proprietor.

The businessman is just like a creditor of the business. 8

 2. Money measurement assumption

• As per this concept only monetary transactions are

recorded in the books of accounts.
• Measurement of business transactions in money helps in
understanding the state of affairs of the business in better
way.
• Accounting does not give the picture of non monetary
items.
• It is due to this concept

1. Recording in terms of money

2. Recording only monetary items.

 GOING CONCERN CONCEPT
 It is the basic idea that business will continue for a long time
while recording and reporting the business transactions.
 It is due to concept that
1. proper distinction is made between capital and revenue
expenditure.
2. assets are classified into current assests and fixed assets.
3.liabilities are classified into short term liabilities and long
term liabilities.
4. Use its fixed Assets till the end of their useful life,
4. Accounting period concept:
o Divides entire indefinite life of business into smaller periods.
o 12 months considered as one accounting period. Reports the results of the activity
undertaken in ‘specific period’.

5. Cost concept:
o Asset is ordinarily recorded in the books at the price at which it was acquired i.e.
at its cost price.
o Though recorded in the books at cost, in the course of time, they become reduced
in value on account of depreciation charges.
o Known as historical cost concept.
o Assets do not reflect the real worth i.e. Price level changes

6. Dual aspect concept:

o “For every debit, there is a credit”.
o Two sided effect to the extent of same amount.
o This concept has resulted in an accounting equation:
Assets – Liabilities = Proprietor’s claim
7. Revenue Recognition Concept:
o Profit should be considered only when realized.
o No anticipated profit should be taken credit of.
o

8. Matching Concept:
o Expenses should be matched to the revenue of
the appropriate accounting period.
o For Example- Salary paid in January 2011
relating to December 2010 should be treated as
expenditure for the year 2010 and not 2011.
9. Accrual Concept:
o Accrual is concerned with expected future cash
receipts and payments.
o Make record of all expenses and incomes relating to
accounting period whether actual cash has been
disbursed or received or not.
o For e.g. purchases and sales of goods on credit, rent
(not yet paid), salaries outstanding etc.

10. Stable monetary unit concept:

o Purchasing power of monetary unit remains same
throughout.
 Accounting Conventions
1. Convention of disclosure:
o Financial statements should disclose all material
information clearly to the reader.
o State the fact of change in accounting policies and
methods (if any)
2. Convention of consistency:
o Same accounting principles for preparing financial
statements for different periods.
o Policy once adopted must not be changed.
o Only be changed by showing the fact in the annual report.
o For e.g. - Depreciation
3. Convention of conservatism:
o Cautious approach or policy of ‘’Play safe’’.
o Be pessimistic.
o All losses must be provided but profits should not be
anticipated.
o Possibility of loss – taken into account at the earliest.
o Prospect of profit – ignored until it does not materialise.

4. Convention of materiality:
o Only significant transactions recorded.
o Insignificant transactions should find no place in the
books of accounts.
 Accounting Equation

• In every business transaction, one aspect

represents the assets or expenses and
other represents the claim or income and
these two aspects are always equal. This
approach generates the concepts of
Accounting equation, which can be
summarized as below:
 Procedure for developing An
Accounting Equation
Step I
Ascertain the variable(i.e. Assets, liabilities Or Capital).

Step II
Find out the effect on the transaction.

Step III
Show the effect but ensure that the total of right hand side is equal to left hand
side.