5573385 Accounting Principles

8/9/2019 5573385 Accounting Principles

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BASIC ACCOUNTINGCONCEPTS &CONVENTIONS

Presentation By

Prof. DEEPAK TANDON

IILM Gurgaon


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ACCOUNTINGPRINCIPLES

-related to the growth of the

business

Well being, solvency,earning

potential

Arisen fromexperiences,precedents,statements,

Govt agencies


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INPU

T

PROCES

S

OUTPU

T

Recording

Economic events Classifying Information to

Measured in Summarising User

sFinancial terms Interpreting


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PROCESS OF ACCOUNTING

In order to accomplish its main objective of communicating information

to the users accounting performs the following functions:

Recording It is concerned with the recording of financialtransactions in an orderly manner,soon after their occurrence in the

proper books of accounts.

Classifying It is concerned with the systematic analysis ofthe recorded data so as to accumulate the transactions of similar

type at one place.

Summarising It is concerned with the preparations andpresentation of classified data in a manner useful to the users.

This function involves of financial statements

Interpreting The accountant should explain not only what hashappened but also (a)why it happened ,and (b) what is likely to happen

under specified condition


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ACCOUNTING CYCLE

Step 1 : JOURNALISIN

G

Step 2: POSTIN

G

Step 3: BALANCIN

G

Step 4: TRIAL

BALANCE

Step 5: INCOME

STATEMENT

Step 6: BALANCESHEET


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CONCEPTS &CONVENTIONS

Concept=Accounting postulates:-

A.Entity concept

B.Dual Aspect Concept

C.Going Concern Concept

D.Accounting period Concept

E.Money measurement concept

F.Cost concept


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G.Periodic matching of the cost & revenueConcept

H. Variable Objective evidence Concept

CONVENTIONS:

--Disclosure/ Materiality/Consistency/conservatism


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BUSINESS ENTITYCONCEPT

For accounting purposes the Business

enterprise and the Owner are two separateentities

Can easily applied in case of limited liability

company because it is alegal entity

Togh to apply for partnership // Sole trader/ one

man business

Enabled the development of responsibility

accounting


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CONTD

Without these no business can be started or

run eg Building, plant & machinery, cash athand

CAPITAL Where these assets come from ?

When the proprietor invests money in thebusiness then the transaction gives rise to 2effects Assets of business increase and claimof proprietor on assets of business isrecognized. _____DUAL CONCEPT

CAPITAL=ASSETS


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THE MONETARY CONCEPT

All business transactions must be in the

currency of the country

Money is common unit of recordingtransactions relating to assets / Liabilities/

capital

Limitation Purchasing power ignores inflation

& doesnot take in account quality ofmanagement


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Contd --

Creditors in case the capital is contributed by

the proprietor is insufficient , business takes toborrowing from other parties.

Loan given by outside parties -------Increases

the cash (Asset),credit facilitygranted bysuppliers increases the goods-in trade of the

business

CAPITAL

+LIABILITIES=ASSETS===ACCOUNTING EQUATION

DOUBLE ENTRY

SYSTEM


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GOING CONCERNCONCEPT

-unless and until it has entered into a state of

liquidation, it will be viewed as to have anindefinite life.

A. accountant of the business does not make

unnecessary assumption regarding the forcedsale value of goods and assets

B.assets are depreciated on the basis ofexpected life rather than on the basis of marketvalue.

FUNDAMENTAL ACCOUNTING PRINCIPLE

ACCOUNTING PERIOD


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ACCOUNTING PERIODCONCEPT :

-Strictly speaking net income can be measured

by comparing assets of the business existing

at the time of its commencement with those

existing at the time of liquidation

-The Balance sheet & P/Laccounts should be

prepared at regular intervals which is one year

beginning on a specific date and ending 12

months later.


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MONEY MEASUREMENTCONCEPT

-accounting every worth of recording event,happening or transaction is recorded in termsof money.

-concept increases the understanding of the stateof affairs of the business

---Limitation ---subsequent changes in the money

value are conveniently ignored


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COST CONCEPT

-a. Asset is recorded at the price paid toacquire it ---I.e. At cost

B-This cost is the basis for all subsequentaccounting for the asset

When asset is recorded at cost price ,thechange in the real worth of the asset with the

passage of time is ordinarily recorded in the

accounts books.


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The fixed assts are recorded in the books of

accounts at a price paid for them

The cost is the amount or money spent inpurchasing the asset, amount spent in installing

and all expenses paid in making the assetready for use.

Record Fixed assets at historical costs asMarket value costly

PERIODIC MATCHING OF


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PERIODIC MATCHING OFCOST AND REVENUECONCEPT

A. revenue realisation-Determination of periodin which the revenue will be realised is the mainconcern---Cash basis//sales basis//production

basis

B. Matching Costs-In determining net income

from the business organisation al costs whichare applicable to the revenue of the periodshould be charged against that revenue.


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ACCOUNTINGCONVENTIONS

1.Convention of Disclosure

2.Convention of Materiality 3.convention of Consistency

4. Convention of Conservatism


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FULL DISCLOSURE

Full, adequate, Fair accounting information

Every financial statement should fully disclose

all relevant information that affects the average

investor

Honest reportings, summary of the accounting

policies followed by Financial statements is

appended.


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MATERIALITY

An item is to be considered as material

(significant} if the knowledge of that item

could affect the users of the financial

statements in taking some decisions

such as to invest or not to invest in the

enterprise or to give loan or not


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CONSISTENCY

Same accounting methods will be used for

similar items overtime.

I.Vertical Consistency within an inter-relatedgroup of financial statements bearing the same

date

Ii. Horizontal consistency found between

financial statements from period to period thusenabling comparison of performance of `oneentity with another.

CONSERVATISM


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CONSERVATISM(PRUDENCE)

Anticipate no gains but provide for all

losses and if in doubt write them off.

Thus accountant should record not only

actual losses but also those losses thatare likely to occur., Provision for bad

debts, premium on redemption of

debentures etc.


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Other forms of relationship

CAPITAL +LIABILITIES

=ASSETS NET WORTH =ASSETS-

LIABILITIES II.OWNERS EQUITY =TOTAL EQUITY

EQUITY OF THECREDITORS TOTAL EQUITY = TOTAL

ASSETS OWNER EQUITY =

TOTALEQUITY+REVENUE-EXPENSE EQUITY

OFTHE

CREDITORS


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Nature Of Accounts & RulesANY CAPITAL

ACCOUNT

RULES A/cs Dr Cr

Having RECORD RECORD

DECREASE INCREASESame

RuleANY LIABILITY

ACCOUNT

RECORD RECORD

DECREASE INCREASE

REVENUE Cr-

ACCOUNT-Dr RECORD

DECREASE INCREASE


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FOR ASSETS ACCOUNTS

-Dr means Increase

CrMeans Decrease

FOR EXPENSE ACCOUNT

Dr Means Increase

Cr-Means Decrease


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RULES

Dr Cr

PERSONAL -- The receiver The

Giver REAL -- What comes in What goes out

Nominal-- All Losses & All Gains &

Expenses Incomes


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5573385 Accounting Principles

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