ACCOUNTING CONCEPTS AND

CONVENTIONS

BY-: MANMOHAN GUPTA 01

CONTENTS-:

Accounting Concepts…………… Meaning……… Types…………

Accounting Conventions………. Meaning……… Types………….
Difference B/w Accounting Concepts & Conventions…………………..

No enterprise can prepare its financial statements without considering these concepts. 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.ACCOUNTING CONCEPTS -: In order to make the accounting language convey the same meaning to all people & to make it more meaningful.

1) BUSINESS ENTITY CONCEPT Business is treated as separate & distinct from its members  Separate set of books are prepared.  For other business of proprietor different books are prepared.  .  Proprietor is treated as creditor of the business.

 Transactions of qualitative nature. even though of great importance to business are not considered.2) MONEY MEASUREMENT CONCEPT Transactions of monetary nature are recorded.  .

 Because of this concept.3) GOING CONCERN CONCEPT Business will continue for a long period. outside parties enter into long term contracts with the enterprise.  As per this concept. fixed assets are recorded at their original cost & depreciation is charged on these assets.  .

 Accounting period is of two typesfinancial year(1st Apr to 31st March) & calendar year(1st Jan to 31st Dec).  .4) ACCOUNTING PERIOD CONCEPT Entire life of the firm is divided into time intervals for ascertaining the profits/losses are known as accounting periods.

 Companies having their shares listed on stock exchange publishes their quarterly results. For taxation purposes financial year is adopted as prescribed by the Govt. .

it is known as historical cost.e.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.

JUSTIFICATION FOR HISTORICAL COST CONCEPT This cost is objectively verifiable.  Current values are difficult to determine.  Difficult to keep track of up down of the market price.  Justified by going concern concept.  .

etc.DRAWBACKS OF HISTORICAL CONCEPT Assets for which nothing is paid will not be recorded like reputation. brand value.  .  Information based on historical cost may not be useful to its members.

6) DUAL ASPECT CONCEPT     Every transaction recorded in books affects at least two accounts. This system of recording is known as “DOUBLE ENTRY SYSTEM”. If one is debited then the other one is credited with same amount. ASSETS = LIABILITIES + CAPITAL .

3.7) REVENUE RECOGNITION/REALISATION CONCEPT   1. Revenue is realised on three basis-: Basis of cash Basis of sale Basis of production . Revenue means the addition to the capital as a result of business operations. 2.

 . first revenue should be recognised & then costs incurred for generating that revenue should be recognised. for matching costs with revenue.  Accordingly.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.

3. Prepaid expenses are not shown in the P&L a/c. Closing stock should be carried over to the next period as opening stock. 2.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. 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. they are recorded in the accounting period in which they assist in earning the revenues whether the cash is paid for them or not.e.

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. invoices. . It is possible only when each transaction is supported by verifiable documents & vouchers such as cash memos.

 .  Delay in providing accounts serves no usefulness for the users for decision making.11) TIMELINESS This principle states that the information should be provided to the users at right time for the purpose of decision making.

12) COST BENEFIT PRINCIPLE  This principle states that the cost incurred in applying the principles should be less than the profits derived from them. .

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. .

 It does not mean that leaking out the secrets of the business.  Proforma & contents of balance sheet & P&L a/c are prescribed by Companies Act.  .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.

 . intra firm & inter firm.2) CONVENTION OF CONSISTENCY Accounting method should remain consistent year by year.  This facilitates comparison in both directions i.  This does not mean that a firm cannot change the accounting methods according to the changed circumstances of the business.e.

 It is a policy of playing safe.  Provisions is made for all losses even though the amount cannot be determined with certainity  .3) CONVENTION OF CONSERVATISM All anticipated losses should be recorded but all anticipated gains should be ignored.

 Items having an insignificant effect to the user need not to be disclosed.4) CONVENTION OF MATERIALITY According to American Accounting Association.  . “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.

DIFFERENCE B/W CONCEPTS & CONVENTIONS BASIS ACCOUNTING CONCEPTS Established By law ACCOUNTING CONVENTIONS Guidelines based upon customs or usage Biasness in adoption Biasness Uniformity No space for personal biasness in the adoption Uniform adoption No uniform adoption .

THE END .

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