Accounting Principles
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Generally Accepted Accounting Principles
The Backbone of Accounting Information system,
1. Accounting Assumptions.2. Accounting Concepts/Conventions.3. Accounting Standards.
( Accounting Principles are the doctrines behind the application of accounting concepts/practices)
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Consistency
Accrual
Going concern
FUNDAMENTAL ACCOUNTING ASSUMPTIONS
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Meaning : Accounting policy chosen should be consistently applied
Example : ABC Ltd. uses WDV method of Depreciation, year after year.
Objective: Comparability, Understandability
Consistency
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- A Basis of Accounting.
- Transactions are recorded as per its accrual/not on realization.
- Expenses are recognized on its incurrence, not when paid
- Incomes are recognized when earned, not received.
Accrual
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Accrual basis Cash Basis
- Recording in the period of - Recording in the period of
transaction accrued (Cash/Credit) receipt/payment of Cash
- Distinction of Capital/Revenue - No such distinctiontransactions- Capital Transactions (Balance Sheet)Revenue transactions (P & L A/c)- Eg. P & L A/c, - Eg. Cash, Bank, Receipts
Income & Expenditure A/c & Payments A/c
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Basis of Accounting
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The business will go on forever, It will never end either intentionally or
unintentionally.
Due to this concept, the Assets/Liabilities have been divided
into Fixed/Current.
Going Concern
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AS PER ACCOUNTING STANDARD 1
“ DISCLOSURE OF ACCOUNTING POLICIES”
ACCOUNTING ASSUMPTIONS ARE NOT TO DISCLOSED (IF FOLLOWED)
Fundamental Accounting Assumptions
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Business Entity Money Measurement Dual Aspect
Historical Cost
Conservatism
Matching Periodicity Materiality Full
Disclosure
Revenue Recognition
Accounting Concepts
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Owner & the business Entity are separate persons
Personal assets/liabilities not included in business accounting
Personal expenses from business- “Drawings”
Capital by owner- “Liability” for business
Business Entity Concept
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Asset/Liability – recorded at ORIGINAL COST
Market Value/Time value of money- not considered.
Original Cost= Purchase Cost + Capital Expenditure
Historical Cost Conept
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Transactions/Events measurable in Money are only considered
Only Quantitative transactions (No Qualitative)
Items, not in money terms “ not a transaction at all”- should not be recorded
Money measurement Concept
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A scale/standard of measurement Limitations:
1. No universal denomination.2. Not stable in the dimension3. Not an exact measurement discipline
Elements :
a. Identification of objects & events to be measured
b. Selection of standard or scale to be used.c. Evaluation of dimension or measurement
standard or scale.
Money
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Historical Cost Realizable value
Current/Replacement Cost
Present Value (as per time value of money)
Note : Future Value is ignored
Valuation Principles
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Concept of definite accounting period
An accounting period is to be selected (as business life is indefinite)
Helps in :- Comparison (Intra Firm/Inter Firm)- Uniformity/Consistency- Matching
Periodicity Concept
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The periodical revenues earned & expenses incurred should be matched.
Helps in compiling P & L A/c
Matching Concept
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Also known as “ Double Entry System”
Every transaction or event has two aspects (Debit & Credit) or affect at least two accounts.
For every Debit, there is an equal credit, for every credit, there is an equal debit.
Verification: “Accounting Equation” (Based on Balance Sheet)
“Capital + Liabilities = Assets”
Dual Aspect Concept
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Prudence Concept (being Cautious)
“Do not anticipate the probable incomes/profits, but
provide for all the probable losses
leads to understatement of assets (Cost /Market Value, whichever is lower)
Contradicts Cost Concept
Conservatism Concept
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Items having significant effects
(relevant for decision makers)
Should be disclosed separately ( highlighted)
exception of the full disclosure conceptNote :a. Materiality (both quantitative/qualitative point of view)b. Insignificant/Small items may be ignored.
Materiality
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every aspect of the accounting should be shown/disclosed
Nothing should be hidden
Determines the characteristic of “Completeness”
Informations are disclosed in “Notes to accounts”
Full Disclosure Concept
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Also called as “Realization concept”
Transaction to be recognized when “realized”
REVENUE RECOGNITION CONCEPT
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Specific accounting principles and methods of applying these principles
Policies vary from concern to concern
areas where different Accounting policies can be used:a. Methods of depreciationb. Valuation of inventoriesc. Valuation of investmentsd. Etc.
Accounting policies
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Basis of selection of Accounting policies
Prudence Materiality
Substance over form
Note : The characteristics of True & fair view & Accrual is also considered
Selection of Accounting policies
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Accounting policies should be consistently applied
Policy can be changed :
a. Change is required as per statute/legislatureb. Change is for compliance of Accounting Standardc. For more better/appropriate presentation of
financial statement
Accounting policies
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The judgments/reasonable estimates needed.
Provisions (an accounting estimate)
Change in accounting estimate
difference arises between certain parameters estimated earlier and re-estimated during the current period or actual result achieved during the current period.
Accounting estimates
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Q.1. RPC Ltd. follows the written down value method of depreciating machinery year after year by applying the principle of
MCQs
Comparability
Convenience
Consistency
All of the above
C
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Q.2. “Business unit is separate & distinct from the persons who supply capital to it”, is based on
MCQs
Money Measurement Concept
Going concern Concept
Business Entity Concept
Dual Aspect Concept
c
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Q.3. All of the following are valuation principles except:
MCQs
Historical Cost
Present Value
Future Value
Net Realizable Value
c
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Q.4. A businessman purchased goods for ` 25,00,000 and sold 80% of such goods during the accounting year ended 31st March, 2011. The market value of the remaining goods was ` 4,00,000. He valued the closing Inventory at cost. He violated the concept of
MCQs
Money measurement
Conservatism
Cost
Periodicity
b
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Q.5. Writing of transaction in the ledger is called :
MCQs
Posting
Journalizing
Balancing
Casting
a
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Q.6. The Cost of a Calculator has been treated as an expense due to which concept?
MCQs
Prudence
Substance over Form
Materiality
All of These
c
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Q.7. In double entry book keeping system, every transaction affects at least ______account(s).
MCQs
One
Two
Three
Four
b
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Q.8. According to which concept, the owner of an enterprise pays the ‘interest on drawings’?
MCQs
Accrual concept
Conservatism concept
Dual aspect concept
Entity concept
d
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Q.9. Fundamental Accounting Assumptions are:
MCQS
Going Concern, Conservation, Accrual
Going Concern, matching, consistency
Going concern, Consistency, Accrual
Going concern, entity, Periodicity
c
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Q.10. Double entry Principle means:
MCQs
Writing twice the same entry
Writing all the entries twice in the book
Having debit for every credit and credit for each debit
All of the above
c