ACCOUNTING CONCEPTS AND

CONVENTIONS
© 2017 BSE Institute Limited
Recap of Session 2

 Define double entry system.

 Describe its advantages and disadvantages.
 List debit and credit and rules thereon.
 List the various types of accounts.

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Session Objectives

In this session, you will be able to:

 Define the term accounting concept.
 Describe the meaning and significance of various
accounting concepts.
 Describe the meaning and significance of various
accounting conventions.

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Discussion
State True or False:

1)Accounting records only those facts and events which

are capable of being expressed in money.
2)Balance sheet is prepared on the basis of cost concept
and accounting period concept.
3)Unrealized profit must be considered in accounting.
4)Excess of assets over liabilities represents capital.
5)In accounting all transactions are recorded as having
dual concept.
6)All facts whether material or immaterial are recorded in
accounting.
7)Drawings reduce capital.
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Need
l The main objective is to maintain uniformity and
consistency in accounting records. These concepts
constitute the very basis of accounting.
l All the concepts have been developed over the years
from experience and thus they are universally
accepted rules.

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Various Accounting Concepts

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Business Entity
l This concept assumes that, for accounting purposes,
the business enterprise and its owners are two
separate independent entities.

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Business Entity
l Significance:
 This concept helps in ascertaining the profit of the business
as only the business expenses and revenues are recorded
and all the private and personal expenses are ignored.
 This concept restraints accountants from recording of
owner’s private/personal transactions.
 It also facilitates the recording and reporting of business
transactions from the business point of view.
 It is the very basis of accounting concepts, conventions and
principles.

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Example
l When the owner invests money in the business, it is
recorded as liability of the business to the owner.
Similarly, when the owner takes away from the
business cash/goods for his/her personal use, it is
not treated as business expense.

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Money Measurement Concept
l This concept assumes that all business transactions
must be in terms of money, that is in the currency of
a country. In our country such transactions are in
terms of rupees.

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Significance
l This concept guides accountants what to record and
what not to record.
l It helps in recording business transactions
uniformly.
l If all the business transactions are expressed in
monetary terms, it will be easy to understand the
accounts prepared by the business enterprise.
l It facilitates comparison of business performance of
two different periods of the same firm or of the two
different firms for the same period.

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Example
l At the end of the year 2006, an organization may have a
factory on a piece of land measuring 10 acres, office building
containing 50 rooms, 50 personal computers, 50 office chairs
and tables, 100 kg of raw materials etc. These are expressed
in different units. But for accounting purposes they are to be
recorded in money terms i.e. in rupees. In this case, the cost
of factory land may be say Rs.12 crore, office building of
Rs.10 crore, computers Rs.10 lakhs, office chairs and tables
Rs.2 lakhs, raw material Rs.30 lakhs. Thus, the total assets of
the organization are valued at Rs.22 crore and Rs.42 lakhs.

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Activity
l Say YES against the information that should be
recorded in the books of accounts and NO against
the information that should not be recorded
1.Health of a managing director.
2.Purchase of factory building Rs.10 crore.
3.Rent paid Rs.100000.
4.Goods worth Rs.10000 given as charity.
5.Delay in supply of raw materials.

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Going Concern Concept
l This concept states that a business firm will continue
to carry on its activities for an indefinite period of
time.

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Significance
l This concept facilitates preparation of financial statements.
l On the basis of this concept, depreciation is charged on the
fixed asset.
l It is of great help to the investors because, it assures them
that they will continue to get income on their investments.
l In the absence of this concept, the cost of a fixed asset will
be treated as an expense in the year of its purchase.
l A business is judged for its capacity to earn profits in future.

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Example
l A company purchases a plant and machinery of Rs.100000
and its life span is 10 years.
According to this concept every year some amount will be
shown as expenses and the balance amount as an asset.

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Activity
l Fill in the blanks:
1.Going concern concept states that every business firm will
continue to carry on its activities ……………..
2.Fixed assets are shown in the books at their ……………..
3.The concept that a business enterprise will not be closed
down in the near future is known as ……………..
4.On the basis of going concern concept, a business prepares
its ..........................
5............................ concept states that business will not be
dissolved in near future.

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Accounting Period Concept
l All the transactions are recorded in the books of
accounts on the assumption that profits on these
transactions are to be ascertained for a specified
period. This is known as accounting period concept.

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Significance
l It helps in predicting the future prospects of the business.
l It helps in calculating tax on business income calculated for a
particular time period.
l It also helps banks, financial institutions, creditors, etc to
assess and analyze the performance of business for a
particular period.
l It also helps the business firms to distribute their income at
regular intervals as dividends.

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Example
l Financial Year

l Calendar Year

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Activity
l Fill in the blanks
1.Recording of transactions in the books of accounts with a
definite period is called ………………. concept.
2.The commonly accepted accounting period in India is
……………….
3.According to accounting period concept, revenue and
expenses are related to a ………………. period.
4. If accounting year begins from 1st of January, and ends on
31st of December, it is known as ……………….
5.If accounting year begins from 1st of April and ends on 31st
of March, then accounting year is known as
……………….

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Accounting Cost Concept

l Accounting cost concept states that all assets are

recorded in the books of accounts at their purchase
price, which includes cost of acquisition,
transportation and installation and not at its market
price.

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Significance
l This concept requires asset to be shown at the price
it has been acquired, which can be verified from the
supporting documents.
l It helps in calculating depreciation on fixed assets.
l The effect of cost concept is that if the business
entity does not pay anything for an asset, this item
will not be shown in the books of accounts.

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Example
l A machine was purchased by XYZ Limited for Rs.500000,
for manufacturing shoes. An amount of Rs.1,000 were spent
on transporting the machine to the factory site. In addition,
Rs.2,000 were spent on its installation. The total amount at
which the machine will be recorded in the books of accounts
would be the sum of all these items i.e. Rs.5,03,000.

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Activity
l Fill in the blanks:
1.The cost concept states that all fixed assets are recorded in
the books of accounts at their …………. price.
2.The main objective to adopt historical cost in recording the
fixed assets is that the cost of the assets will be easily
verifiable from the ………….documents.
3.The cost concept does not show the …………. of the
business.
4.The cost concept is otherwise known as ………….
concept.

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Dual Aspect Concept
l Dual aspect is the foundation or basic principle of
accounting. It provides the very basis of recording
business transactions in the books of accounts.
l This concept assumes that every transaction has a
dual effect, i.e. it affects two accounts in their
respective opposite sides. Therefore, the transaction
should be recorded at two places.

Assets= Liabilities + Capital

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Significance
l This concept requires asset to be shown at the price
it has been acquired, which can be verified from the
supporting documents.
l It helps in calculating depreciation on fixed assets.
l The effect of cost concept is that if the business
entity does not pay anything for an asset, this item
will not be shown in the books of accounts.

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Activity
l Fill in the blanks:
1.The cost concept states that all fixed assets are recorded in
the books of accounts at their …………. price.
2.The main objective to adopt historical cost in recording the
fixed assets is that the cost of the assets will be easily
verifiable from the ………….documents.
3.The cost concept does not show the …………. of the
business.
4.The cost concept is otherwise known as ………….
concept.

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Realization Concept
l This concept states that revenue from any business
transaction should be included in the accounting
records only when it is realized.
l Revenue is said to have been realized when cash has
been received or right to receive cash on the sale of
goods or services or both has been created.

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Significance
l This concept requires asset to be shown at the price
it has been acquired, which can be verified from the
supporting documents.
l It helps in calculating depreciation on fixed assets.
l The effect of cost concept is that if the business
entity does not pay anything for an asset, this item
will not be shown in the books of accounts.

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Activity
l Fill in the blanks:
1.The cost concept states that all fixed assets are recorded in
the books of accounts at their …………. price.
2.The main objective to adopt historical cost in recording the
fixed assets is that the cost of the assets will be easily
verifiable from the ………….documents.
3.The cost concept does not show the …………. of the
business.
4.The cost concept is otherwise known as ………….
concept.

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Accrual Concept
l The meaning of accrual is something that becomes
due especially an amount of money that is yet to be
paid or received at the end of the accounting period.
l The accrual concept under accounting assumes that
revenue is realized at the time of sale of goods or
services irrespective of the fact when the cash is
received.

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Significance
l This concept requires asset to be shown at the price
it has been acquired, which can be verified from the
supporting documents.
l It helps in calculating depreciation on fixed assets.
l The effect of cost concept is that if the business
entity does not pay anything for an asset, this item
will not be shown in the books of accounts.

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Example
l A machine was purchased by XYZ Limited for Rs.500000,
for manufacturing shoes. An amount of Rs.1,000 were spent
on transporting the machine to the factory site. In addition,
Rs.2,000 were spent on its installation. The total amount at
which the machine will be recorded in the books of accounts
would be the sum of all these items i.e. Rs.5,03,000.

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Activity
l Fill in the blanks:
1.The cost concept states that all fixed assets are recorded in
the books of accounts at their …………. price.
2.The main objective to adopt historical cost in recording the
fixed assets is that the cost of the assets will be easily
verifiable from the ………….documents.
3.The cost concept does not show the …………. of the
business.
4.The cost concept is otherwise known as ………….
concept.

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Matching Concept
l The matching concept states that the revenue and the
expenses incurred to earn the revenues must belong
to the same accounting period. So once the revenue
is realized, the next step is to allocate it to the
relevant accounting period. This can be done with
the help of accrual concept.

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Significance
l It guides how the expenses should be matched with
revenue for determining exact profit or loss for a
particular period.
l It is very helpful for the investors/shareholders to
know the exact amount of profit or loss of the
business.

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Activity
l Fill in the blanks:
1.The cost concept states that all fixed assets are recorded in
the books of accounts at their …………. price.
2.The main objective to adopt historical cost in recording the
fixed assets is that the cost of the assets will be easily
verifiable from the ………….documents.
3.The cost concept does not show the …………. of the
business.
4.The cost concept is otherwise known as ………….
concept.

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 Accounting Conventions

FA&FR3/ Accounting Concepts and Conventions © 2017 BSE Institute Limited

Class Discussion
l What are accounting conventions as opposed to
accounting concepts?

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Accounting Conventions

Convention Convention Convention

of Convention
of full of
consistency. of materiality.
disclosure. conservatism.

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Convention of Consistency
l The convention of consistency means that same
accounting principles should be used for preparing
financial statements year after year.
l Types of consistency:
 Vertical consistency
 Horizontal consistency
 Dimensional consistency

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Significance
l It facilitates comparative analysis of the financial
statements.
l It ensures uniformity in charging depreciation on
fixed assets and valuation of closing stock.

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Activity
l Fill in the blanks:
1.Convention of consistency means that same accounting
principles should be used for preparing financial statements
...………
2.Unsold goods are valued at cost price or ...………
whichever is ...………
3.Precious metals, like gold, mineral and others are generally
valued at………… .
4.As per the convention of …………. year after year same
methods are followed.

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Convention Of Full Disclosure
l Convention of full disclosure requires that all
material and relevant facts concerning financial
statements should be fully disclosed.

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Significance
l It facilitates comparative analysis of the financial
statements.
l It ensures uniformity in charging depreciation on
fixed assets and valuation of closing stock.

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Activity
l Fill in the blanks:
1.Convention of consistency means that same accounting
principles should be used for preparing financial statements
...………
2.Unsold goods are valued at cost price or ...………
whichever is ...………
3.Precious metals, like gold, mineral and others are generally
valued at………… .
4.As per the convention of …………. year after year same
methods are followed.

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Convention Of Materiality
l The convention of materiality states that, to make
financial statements meaningful, only material facts,
i.e. important and relevant information should be
supplied to the users of accounting information.

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Significance
l It facilitates comparative analysis of the financial
statements.
l It ensures uniformity in charging depreciation on
fixed assets and valuation of closing stock.

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Activity
l Fill in the blanks:
1.Convention of consistency means that same accounting
principles should be used for preparing financial statements
...………
2.Unsold goods are valued at cost price or ...………
whichever is ...………
3.Precious metals, like gold, mineral and others are generally
valued at………… .
4.As per the convention of …………. year after year same
methods are followed.

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Convention Of Conservatism
l This convention is based on the principle that
“Anticipate no profit, but provide for all possible
losses”.

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Significance
l It facilitates comparative analysis of the financial
statements.
l It ensures uniformity in charging depreciation on
fixed assets and valuation of closing stock.

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Activity
l Fill in the blanks:
1.Convention of consistency means that same accounting
principles should be used for preparing financial statements
...………
2.Unsold goods are valued at cost price or ...………
whichever is ...………
3.Precious metals, like gold, mineral and others are generally
valued at………… .
4.As per the convention of …………. year after year same
methods are followed.

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 THANK YOU
© 2017 BSE Institute Limited