Accounting Concept Final

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CCOUNTING

CONCEPTS ND

PRINCIPLES

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INTRODUCTION

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 ofconcepts which are usually followed for

preparing the financial statements.

These concepts provide a foundation for

accounting process. No enterprise canprepare its financial statements without

considering these concepts.

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ACCOUNTING CONCEPTS

Business entityconcept

Money

Measurement/stablemonetary unit concept

Going Concernconcept

Historical Cost concept Prudence/conservatis

m concept

Materiality concept

Accounting period

Dual aspect concept

Revenue recognitionconcept

Matching conceptAccrual concept

Objectivity concept

Timeliness

Consistency concept

Full disclosure concept

Uniformity concept

Relevance concept 3


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BUSINESS ENTITY CONCEPT

Meaning

The business and its owner(s) are two separate

existence entity

Any private and personal incomes and expensesof the owner(s) should not be treated as the

incomes and expenses of the business

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Examples

Insurance premiums for the owners houseshould be excluded from the expense ofthe business

The owners property should not beincluded in the premises account of thebusiness

Any payments for the owners personalexpenses by the business will be treatedas drawings and reduced the ownerscapital contribution in the business

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MONEY MEASUREMENT / STABLE MONETARY

UNIT CONCEPT

Meaning

All transactions of the business arerecorded in terms of money

It provides a common unit of measurement

Examples

Market conditions, technological changes

and the efficiency of management wouldnot be disclosed in the accounts

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GOING CONCERN CONCEPT

Meaning

The business will continue in operationalexistence for the foreseeable future

Financial statements should be prepared on agoing concern basis unless management eitherintends to liquidate the enterprise or to ceasetrading, or has no realistic alternative but to do

so

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Example

Possible losses form the closure ofbusiness will not be anticipated in theaccounts

Prepayments, depreciation provisions maybe carried forward in the expectation ofproper matching against the revenues offuture periods

Fixed assets are recorded at historicalcost

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HISTORICAL COST CONCEPT

Meaning

Assets should be shown on the balancesheet at the cost of purchase instead of

current value Example

The cost of fixed assets is recorded at thedate of acquisition cost. The acquisition

cost includes all expenditure made toprepare the asset for its intended use. Itincluded the invoice price of the assets,freight charges, insurance or installation

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PRUDENCE/CONSERVATISM CONCEPT

Meaning

Revenues and profits are not anticipated.Only realized profits with reasonablecertainty are recognized in the profit andloss account

However, provision is made for all knownexpenses and losses whether the amountis known for certain or just an estimation

This treatment minimizes the reportedprofits and the valuation of assets

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Example

Stock valuation sticks to rule of the lower

of cost and net realizable value

The provision for doubtful debts should be

madeFixed assets must be depreciated over

their useful economic lives

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MATERIALITY CONCEPT

Meaning

Immaterial amounts may be aggregated

with the amounts of a similar nature orfunction and need not be presented

separately

Materiality depends on the size and nature

of the item

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Example

Small payments such as postage,

stationery and cleaning expenses should

not be disclosed separately. They should

be grouped together as sundry expensesThe cost of small-valued assets such as

pencil sharpeners and paper clips should

be written off to the profit and loss account

as revenue expenditures, although theycan last for more than one accounting

period

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ACCOUNTING PERIOD CONCEPT

Meaning

+Entire life of the firm is divided into timeintervals for ascertaining the profits/losses

are known as accounting periods.+Accounting period is of two types- financialyear(1stApr to 31stMarch) & calendar

year(1

st

Jan to 31

st

Dec).

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DUAL ASPECT CONCEPT

Meaning

+Every transaction recorded in books affects at

least two accounts.

+ If one is debited then the other one is creditedwith same amount.

+ This system of recording is known as DOUBLE

ENTRY SYSTEM.+ASSETS = LIABILITIES + CAPITAL

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REVENUE RECOGNITION CONCEPT

Meaning

+ Revenue means the addition to the capital as a

result of business operations.

+ Revenue is realised on three basis-:

1. Basis of cash

2.Basis of sale

3.Basis of production

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MATCHING CONCEPT

Meaning

+All the revenue of a particular period will bematched with the cost of that period for determining

the net profits of that period.+ Accordingly, for matching costs with revenue,first revenue should be recognized & then costsincurred for generating that revenue should be

recognized.

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ACCRUAL CONCEPT

Meaning

+In this concept revenue is recorded when salesare 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 forthem or not.

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OBJECTIVITY CONCEPT

Meaning

The accounting information should be free from

bias and capable of independent verification

The information should be based upon verifiableevidence such as invoices or contracts

Example

The recognition of revenue should be based onverifiable evidence such as the delivery of goods

or the issue of invoices

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TIMELINESS

Meaning

+ 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.

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CONSISTENCY CONCEPT

MeaningCompanies should choose the most

suitable accounting methods andtreatments, and consistently apply them inevery period

Changes are permitted only when the newmethod is considered better and canreflect the true and fair view of thefinancial position of the company

The change and its effect on profits shouldbe disclosed in the financial statements

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Examples

If a company adopts straight line method

and should not be changed to adoptreducing balance method in other period

If a company adopts weight-average

method as stock valuation and should not

be changed to other method e.g. first-in-first-out method

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FULL DISCLOSURE CONCEPT

Meaning

Financial statements should be prepared toreflect a true and fair view of the financial

position and performance of the enterpriseAll material and relevant information must be

disclosed in the financial statements

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UNIFORMITY CONCEPT

Meaning

Different companies within the same industry

should adopt the same accounting methods and

treatments for like transactionsThe practice enables inter-company

comparisons of their financial positions

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RELEVANCE CONCEPT

Meaning

Financial statements should be prepared

to meet the objectives of the usersRelevant information which can satisfy the

needs of most users is selected and

recorded in the financial statement

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THANK YOU!!

:::::::::::::::::::::::::::::::::::::SubmittedTo:::::::::::::::::::::::::::::::::::::::::::

Mrs. Sarika Bhatnagar

Lecturer

Financial Accounting And Auditing:::::::::::::::::::::::::::::::::::::Submitted

By:::::::::::::::::::::::::::::::::::::::::::

Isha Setia (76) Simran Yadav (1746)

Sonia Bansal (1680) Akansha Goel (423) 26

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Accounting Concept Final