BAAC4204 CH 1 - Accounting Concepts and Conventions

Chapter One
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Course: Taxation Accounting
Course Code: BAAC4206
Specialization: Accounting and Finance
Department of Business Studies
Outcome 1:
Contents
- Accounting Concepts
• Entity concept
• Dual aspect concept
• Going concern concept
• Accounting period concept
• Money measurement concept
• Historical cost concept
• Realization concept
2
Accounting Conventions
• Convention of disclosure
• Convention of materiality
• Convention of consistency
• Monetary measurement
• Separate Entity
• Realization
3
Essential Reading (the main textbook)
URL:
Recommended Reading
ProQuest Resource
Fundamental principles of Accounting
Gangwar ,Sharda, Gangwar D.K, global Media 2008
ISBN : 9788184884517, 9781642875843
URL:
https
://ebookcentral.proquest.com/lib/momp/search.action?query=Fundamental+Principles+of+
Accounting+Sharda+Gangwar+and+D.K.+
Gangwar
Open Educational Resource URL:
4
Introduction
The theory of accounting has, therefore, developed the

concept of a "true and fair view." The true and fair view is
applied in ensuring and assessing whether accounts do
indeed portray accurately the business activities.
To support the application of the "true and fair view",

accounting has adopted certain concepts and conventions
that help to ensure that accounting information is presented
accurately and consistently.
Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

Media, 2008. ProQuest Ebook Central, Page 16
5
Accounting Concepts
The fundamental ideas or basic assumptions underlying the

theory and practice of financial accounting and broad making
rules for all accounting activities, developed by professionals
are as follows:
Entity concept - Business is assumed to have a distinct entity,

i.e., existence other than the existence of its proprietors and
other business units. We as an accountant, will have to
record business transactions from firm's point of view and
never from the viewpoint of proprietors.
6
Dual aspect concept - Every business transaction has double
effect. There are two sides of every transaction. This is
evident when we study the accounting term, i.e., assets,
capital and liabilities.
Going concern concept - While recording business

transactions in the books of accounts, we assume that the
business will be carried on indefinitely. This is why, the
business purchase fixed assets like land and building, plant
and machinery, vehicles and furniture etc.

7
Accounting period concept - The concept of accounting
period facilitates the business in assessing worth after a year.
In order to make accounting meaningful, useful and legal
accounting year cannot be ignored by any business house.
Money measurement concept - In accounting, we identify

and record only those business transactions which are
financial in nature. Accounting transactions must have their
monetary value. The worth of the transaction must be
measured in terms of money.
8
Historical cost concept - According to this concept all
business transactions must be recorded in the books of
accounts at their monetary cost of acquisition. The use of
historical cost as the basis provides verifiable and objectives
accounting information.
Realization concept - Accounting should disclose all the

material information and assets realization account, here
means the information and realization which would have
changed the results of the business, if it would have been
disclosed.
9
Accounting methods (includes a discussion on the concept of
accruals)
The assumption of verifiable objectives that every business

record must be based and supported by documentary
evidence like receipts, bill, invoices, cash memos etc.

10
Understandability - According to this accounting concept
every accounts and other business papers must be
understandable. Accountant can understand if all the papers
are understandable.
Conservatism - The business according to this principles

adopts a safe policy. It accounts for all the prospective losses
but leaves aside all the profits.

11
Comparability - Business is a going concern. It has to
continue indefinitely. Important conclusions are drawn by
comparing accounting statements of the current year with
statements of the previous years. Accurate comparisons can
be made if the methods and practice of accounting and
presentation of accounts does not change.
Accrual (also known as Matching principle) - According to this

principle income can be ascertained by matching revenue of
the business with its costs.

12
Four important accounting concepts underpin the
preparation of any set of accounts

13
Accounting Conventions
Convention of disclosure - This convention is also known as

convention of full disclosure. Accounting must disclose all
material information. It should be honestly prepared free
from any bias, favor or prejudice. Figures should be correct.
Convention of materiality - Accounting should disclose all the

material information. Materiality, here means the information
which would have changed the results of the business, if it
would have been disclosed.

14
Convention of consistency - Business is a going concern. It
has to continue indefinitely. Important conclusions are drawn
by comparing accounting statements of the current year with
statements of the previous years. Accurate comparisons can
be made if the methods and practice of accounting and
presentation of accounts does not change.

15
The most commonly encountered convention is the
"historical cost convention." This requires transactions to be
recorded at the price ruling at the time, and for assets to be
valued at their original cost.
Under the "historical cost convention", therefore, no account

is taken of changing prices in the economy.
16
Accounting conventions
Monetary measurement
Accountants do not account for items unless they can be

quantified in monetary terms. Items that are not accounted
for (unless someone is prepared to pay something for them)
include things like workforce skill, morale, market leadership,
brand recognition, quality of management.

17
Separate Entity
This convention seeks to ensure that private transactions

and matters relating to the owners of a business are
segregated from transactions that relate to the business

18
Realization: With this convention, accounts recognize
transactions (and any profits arising from them) at the point
of sale or transfer of legal ownership - rather than just when
cash actually changes hands.
"For example, a company that makes a sale to a customer can

recognize that sale when the transaction is legal - at the
point of contract. The actual payment due from the customer
may not arise until several weeks (or months) later - if the
customer has been granted some credit terms.
19
Materiality: An important convention. As we can see from
the application of accounting standards and accounting
policies, the preparation of accounts involves a high degree
of judgment.
Where decisions are required about the appropriateness of a

particular accounting judgment, the "materiality" convention
suggests that this should only be an issue if the judgment is
"significant" or "material" to a user of the accounts.
The concept of "materiality" is an important issue for auditors

of financial accounts.
20
Characteristics of Accounting Information
Understandability: This implies the expression, with clarity, of

accounting information in such a way that it will be
understandable to users - who are generally assumed to have
a reasonable knowledge of business and economic activities.
Relevance : This implies that, to be useful, accounting

information must assist a user to form, confirm or maybe
revise a view - usually in the context of making a decision
(e.g., should I invest, should I lend money to this business?
Should I work for this business?)

Media, 2008. ProQuest Ebook Central, Page 19 and 20
21
Consistency: This implies consistent treatment of similar items
and application of accounting policies.
Comparability: This implies the ability for users to be able to

compare similar companies in the same industry group and to
make comparisons of performance over time. Much of the
work that goes into setting accounting standards is based
around the need for comparability.

22
Reliability : This implies that the accounting information that
is presented is truthful, accurate, complete (nothing
significant missed out) and capable of being verified (e.g., by a
potential investor).
Objectivity: This implies that accounting information is

prepared and reported in a "neutral" way. In other words, it is
not biased towards a particular user group or vested interest.

23
Reference
Books : Fundamental Principles of Accounting
Sharda Gangwar and D.K. Gangwar
Websites:
https://ebookcentral.proquest.com/lib/momp/search.action?
query=Fundamental+Principles+of+Accounting+Sharda+Gan
gwar+and+D.K.+Gangwar+
Videos:
24
CONTACT INFORMATION:
Name of the Staff : Sameena Begum

Office: BS050
Email: sameena.begum @hct.edu.om
VERSION HISTORY
Version No Date Approved Changes incorporated
01 Sem. (I) 2019/2020
25

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Chapter One

You might include a

The theory of accounting has, therefore, developed the

To support the application of the "true and fair view",

Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

The fundamental ideas or basic assumptions underlying the

Entity concept - Business is assumed to have a distinct entity,

Going concern concept - While recording business

Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

Money measurement concept - In accounting, we identify

Realization concept - Accounting should disclose all the

The assumption of verifiable objectives that every business

Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

Conservatism - The business according to this principles

Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

Accrual (also known as Matching principle) - According to this

Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

Convention of disclosure - This convention is also known as

Convention of materiality - Accounting should disclose all the

Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

Under the "historical cost convention", therefore, no account

Accountants do not account for items unless they can be

Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

This convention seeks to ensure that private transactions

Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

"For example, a company that makes a sale to a customer can

Where decisions are required about the appropriateness of a

The concept of "materiality" is an important issue for auditors

Understandability: This implies the expression, with clarity, of

Relevance : This implies that, to be useful, accounting

Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

Comparability: This implies the ability for users to be able to

Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

Objectivity: This implies that accounting information is

Gangwar, Sharda, and D.K. Gangwar. <i>Fundamental Principles of Accounting</i>, Global

Sharda Gangwar and D.K. Gangwar

Name of the Staff : Sameena Begum

Version No Date Approved Changes incorporated

01 Sem. (I) 2019/2020

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