CONCEPT OF ACCOUNTING PRINCIPLES

AND CONVENTIONS

Accounting can be defined as the

process of identifying, measuring,

recording and communicating the

economic events of an organization to

the interested users of the

information.

RECORDING OF FINANCIAL TRANSACTIONS

ONLY.

RECORDING(CASH BOOK,SALES BOOK ETC.)

CLASSIFYING

SUMMARISING

RECORDING IN TERMS OF MONEY

INTERPRETATION OF THE RESULTS

a. TO KEEP SYSTEMATIC RECORD OF BUSINESS TRANSACTIONS.

b. TO CALCULATE PROFIT & LOSSc. TO KNOW THE EXACT REASONS LEADING TOO

NET PROFIT OR NET LOSS.d. TO ASCERTAIN THE FINANCIAL POSITION OF

THE BUSINESS.e. TO ASCERTAIN THE PROGESS OF THE

BUSINESS FROM YEAR TO YEAR.f. TO PREVENT & DETECT ERRORS & FRAUDS.g. TO PROVIDE INFORMATION TO VARIOUS

PARTIES.

FINANCIAL ACCOUNTING

COST ACCOUNTING

MANAGEMENT ACCOUNTING

TAX ACCOUNTING

SOCIAL RESPONSIBILITY

MANAGEMENT(TOP MGT)

EMPLOYEESDIRECTOR(CEO)OWNERLABOUR

DEBTORSFINANCIAL

INSTITUTIONGOVT .CUSTOMERSSUPPLIERS, ETC.

EXTERNAL USERS

Accounting principles can be subdivided into

two categories

        Accounting Concepts; and

        Accounting Conventions.

        Accounting Concepts

        Accounting Conventions

The term ‘concept’ is used to connote accounting postulates, that is necessary assumptions and conditions upon which accounting is based. The term ‘convention’ is used to signify customs and traditions as a guide to the presentation of accounting statements.

Accounting Concepts• Business Entity Concept

• Money Measurement Concept

• Cost Concept Or Historical Cost Concept

• Going Concern Concept

• Dual Aspect Concept

• Revenue Recognition (realisation) concept

• Matching Concept

• Accrual concept

• Accounting Period Concept

Accounting Conventions• Convention of Consistency

• Convention of Disclosure

• Convention of Conservation

• Convention of Materiality

Business is treated as a separate entity or unit apart from its owner and others. All the transactions of the business are recorded in the books of business from the point of view of the business as an entity and even the owner is treated as a creditor to the extent of his/her capital.

In accounting, we record only those

transactions which are expressed in

terms of money. In other words, a fact

which can not be expressed in

monetary terms, is not recorded in the

books of accounts.

Transactions are entered in the books of accounts at the amount actually involved. Suppose a company purchases a car for Rs.1,50,000/- the real value of which is Rs.2,00,000/-, the purchase will be recorded as Rs.1,50,000/- and not any more. This is one of the most important concept and it prevents arbitrary values being put on transactions.

It is persuaded that the business will

exists for a long time and transactions

are recorded from this point of view.

Each transaction has two aspects, that

is, the receiving benefit by one party

and the giving benefit by the other.

This principle is the core of

accountancy.

Thus, the dual aspect can be expressed as under

 

Capital + Liabilities = Assets

or

Capital = Assets – Liabilities

For example, the proprietor of a business starts his business with Cash Rs.1,00,000/-, Machinery of Rs.50,000/- and Building of Rs.30,000/-, then this fact is recorded at two places. That is Assets account (Cash, Machinery & Building) and Capital accounts. The capital of the business is equal to the assets of the business.

Strictly speaking, the net income can be measured by comparing the assets of the business existing at the time of its liquidation. But as the life of the business is assumed to be infinite, the measurement of income according to the above concept is not possible. So a twelve month period is normally adopted for this purpose. This time interval is called accounting period.

It provide more appropriate information about the

performance of business enterprise as compared

to cash basis Accural concept implies equally to

revenues

And expenses.In accrual concept revenue is

recorded when sales are made or services are

rendered and it is immateria; whether cash is

received or not.

Accounting Conventions:

The term ‘convention’ is used to

signify customs and traditions as a

guide to the presentation of

accounting statements.

In order to enable the management to draw important conclusions regarding the working of the company over a few years, it is essential that accounting practices and methods remain unchanged from one accounting period to another. The comparison of one accounting period with that of another is possible only when the convention of consistency is followed.

This principle implies that accounts must be honestly prepared and all material information must be disclosed therein. The contents of Balance Sheet and Profit and Loss Account are prescribed by law. These are designed to make disclosure of all material facts compulsory.

Financial statements are always drawn up on rather a conservative basis. That is, showing a position better than what it is, not permitted. It is also not proper to show a position worse than what it is. In other words, secret reserves are not permitted.

This convention is an exception to the

convention of full disclosure.according to this

convention,items having an insignificant effect

or being irrelevent to the user need not be

disclosed.these unimportant items are either

leftout or merged with other items,otherwise

accounting statements will be unnecessarily

overburdened.