ACCOUNTING

CONCEPTS AND

CONVENTIONS
 Accounting Concepts and Conventions

Specific Learning Outcomes:

After this lecture you will be able to
understand:
 QualitativeCharacteristics of accounting
information
 Accounting Concepts

 Accounting Conventions

 Difference between Accounting Concepts and

Accounting Conventions
QUALITATIVE CHARACTERISTICS OF
ACCOUNTING INFORMATION

To be useful, information should possess

the following qualitative characteristics:
1 relevance
2 reliability
3 comparability
4 consistency
 RELEVANCE
 Accounting information has relevance if it
makes a difference in a decision.
 Relevant information helps users forecast
future events (predictive value),
or it confirms or corrects prior
expectations (feedback value).
 Information must be available
to decision makers before it
loses its capacity to influence
their decisions (timeliness).
 RELIABILITY

 Reliability of information means that the

information is free of error and bias, in
short, it can be depended on.
 To be reliable, accounting information must
be verifiable.
COMPARABILITY AND CONSISTENCY

 Comparability means that the information should be

comparable with accounting information about other
enterprises.
 Consistency means that the same accounting
principles and methods should be used from year to
year within a company.

2020 2019 2018

QUALITATIVE CHARACTERISTICS OF
ACCOUNTING INFORMATION

Useful
Financial
Information has:

Relevance Reliability
1 Predictive 1 Verifiable
value
2 Faithful
2 Feedback value representation
3 Timeliness 3 Neutral

Comparability Consistency
CONTENTS-:
Accounting Concepts……………
Meaning………

Accounting Conventions……….
Meaning………

Difference B/w Accounting

Concepts & Conventions
 Accounting Concepts

In order to make the accounting language convey the same

meaning to all people & to make it more meaningful, most
of the accountants have agreed on a number of concepts
which are usually followed for preparing the financial
statements. These concepts provide a foundation for
accounting process. No enterprise can prepare its financial
statements without considering these concepts.
 1) BUSINESS ENTITY CONCEPT

It is also called separate entity concept.

Business and owners are treated two separate entity.
Business is treated as separate & distinct from its
members
Separate set of books are prepared.
Proprietor is treated as creditor of the business.
For other business of proprietor different books are
prepared.
2) MONEY MEASUREMENT CONCEPT

Transactions of monetary nature are recorded.

Information that can be expressed in monetary
terms.
Transactions of qualitative nature, even though of
great importance to business are not considered.
No accounting is possible which is not measurable in
terms of money.
 3) GOING CONCERN CONCEPT

Going Concern means business will continue to

operate for an indefinite time period and there is no
intention to liquidate the business in the foreseeable
future.
As per this concept, fixed assets are recorded at their
original cost & depreciation is charged on these
assets.
Because of this concept, outside parties enter into
long term contracts with the enterprise.
4) ACCOUNTING PERIOD CONCEPT

Entire life of the firm is divided into time

intervals for ascertaining the profits/losses are
known as accounting periods.
Users need information that is current.
After accounting period business are stop and
see back how things are going.
Usually it is of one year.
At the end of accounting period financial
statements are prepared.
 5) HISTORICAL COST CONCEPT

Assets are recorded at their original price.

This cost serves the basis for further accounting
treatment of the asset.
Acquisition cost relates to the past i.e. it is known as
historical cost.
Through depreciation the asset values are reduced.
 6) DUAL ASPECT CONCEPT

 Every transaction has a dual impact on the

accounting record.
 Every transaction recorded in books affects at least
two accounts.
 If one is debited then the other one is credited with
same amount.
 This system of recording is known as “DOUBLE
ENTRY SYSTEM”.
 ASSETS = LIABILITIES + CAPITAL
7) REVENUE RECOGNITION/REALISATION
CONCEPT

 Revenue is realised on following basis-:

1. Basis of cash
2. Basis of sale (Goods are sold and services are
rendered)
 Mr.A places order on 1st Jan to B. B sends goods
to Mr.A on 15th Jan. Mr.A makes payments on
25th Jan.
 Sale will be presumed at the time when goods are
delivered to Mr.A that is on 15th Jan.
 8) MATCHING CONCEPT

All the revenue of a particular period will be matched

with the cost of that period for determining the net
profits of that period.
Accordingly, for matching costs with revenue, first
revenue should be recognised & then costs incurred
for generating that revenue should be recognised.
Concept of offsetting expenses against revenue on
the basis of “cause and effect” is called matching
concept.
Following points must be considered while matching costs with
revenue

1. Outstanding expenses though not paid in cash

are shown in the P&L a/c.
2. Prepaid expenses are not shown in the P&L a/c.
3. Closing stock should be carried over to the next
period as opening stock.
4. Income receivable should be added in the
revenue & income received in advance should be
deducted from revenue.
 9) ACCRUAL CONCEPT

In this concept revenue is recorded when sales are

made or services are rendered & it is immaterial
whether cash is received or not.
Same with the expenses i.e. they are recorded in the
accounting period in which they assist in earning the
revenues whether the cash is paid for them or not.
 10) OBJECTIVITY CONCEPT

 Accounting transactions should be recorded in an

objective manner, free from the personal bias of
either management or the accountant who prepares
the accounts.
 It is possible only when each transaction is
supported by verifiable documents & vouchers such
as cash memos, invoices.
 11) TIMELINESS

This principle states that the information should be

provided to the users at right time for the purpose of
decision making.
Delay in providing accounts serves no usefulness for
the users for decision making.
 ACCOUNTING CONVENTIONS

An accounting convention may be defined as a custom

or generally accepted practice which is adopted
either by general agreement or common consent
among accountants.
1) CONVENTION OF FULL DICLOSURE

Information relating to the economic affairs of the

enterprise should be completely disclosed which are
of material interest to the users.
It can be made in the body of financial statements or
in notes.
It does not mean that leaking out the secrets of the
business.
 2) CONVENTION OF CONSISTENCY

Accounting method should remain consistent year

by year.
This facilitates comparison in both directions i.e.
intra firm & inter firm.
This does not mean that a firm cannot change the
accounting methods according to the changed
circumstances of the business.
3) CONVENTION OF CONSERVATISM

All anticipated losses should be recorded but all

anticipated gains should be ignored.
It is a policy of playing safe.
Provisions is made for all losses even though the
amount cannot be determined with certainity
 4) CONVENTION OF MATERIALITY

“An item should be regarded as material if there is

reason to believe that knowledge of it would
influence decision of informed investor.”
It is an exception to the convention of full
disclosure.
Items having an insignificant effect to the user
need not to be disclosed.
 DIFFERENCE B/W CONCEPTS &
CONVENTIONS
BASIS ACCOUNTING ACCOUNTING
CONCEPTS CONVENTIONS
Established By law Guidelines based
upon customs or
usage
Biasness No space for Biasness in
personal adoption
biasness in the
adoption
Uniformity Uniform No uniform
adoption adoption
Thank You