8/4/2019 Basic Concepts Session 2
1/17
Basic Concepts
8/4/2019 Basic Concepts Session 2
2/17
Accounting Principles-
Comprise a set of rules , concepts and guidelines
used in preparation of financial accounting reports.
Two Types:
Acc. Concepts
Acc. Conventions
8/4/2019 Basic Concepts Session 2
3/17
Acc. Concepts-
It is building block on which the entire acc. Structure rests . Theyare general ideas or notions . It is used to denote acc.Assumptions which are widely accepted and fundamental tothe science of accounting .
Following are Imp. Acc. Concepts
1) Business Entity Con.
It is assumed that business has separate existence andits entity is different from that of its owners . Every
transaction is analyzed from the point of view of a businessenterprise and not that of person associated with it .Personal assets of the owners or shareholders are notconsidered in the books of accounts of the business.
8/4/2019 Basic Concepts Session 2
4/17
2) Money measurement concept
Only the monetary transactions which are
capable of being expressed in terms of money are
included in accounting records , and those which arenot related are not recorded though they may be
vital to the org . Ex.-Loyalty of employees, entrance
of a competitor, quality of product etc. cannot be
recorded . It ignores changes in the purchasing
power of money and presumes that money remains
constant. i.e. no effect of inflation.
8/4/2019 Basic Concepts Session 2
5/17
3) Dual Aspect concept-
Every business transaction has two fold effectsince the system of recording is based on double
entry sys. Of book keeping . So For every Debit ,there is a Credit .
Assets = Owners Equity + External Liabilities.
For ex. introduction of funds by owner also creates
corresponding obligation for their repayment whichis recorded as capital.
8/4/2019 Basic Concepts Session 2
6/17
4) Going Concern concept-
It means that business activities will continue
for a fairly long period of time , presuming the life
of the business to be perpetual and no intention toliquidate the business in foreseeable future . Thus
continuity of activity implies that assets are
acquired for utilization and not for resale.
8/4/2019 Basic Concepts Session 2
7/17
5) Accounting period concept-
It refers to span of time at the end of which financial
statements are prepared . Though life of business is
considered indefinite , to provide timely information,keeping in view its usefulness to users, indefinite life
of business is split into shorter intervals of time
which are called accounting periods.
8/4/2019 Basic Concepts Session 2
8/17
6) Cost Concept
This concept lies an idea that:
- the resources of the business are recorded in the booksat the actual price paid to acquire them i.e.. the cost
price, but it gets reduced in its value by the amount ofdepreciation charged.
- this cost becomes the basis of accounting of the assetduring the subsequent periods.
The valuation does not reflect the current worth of theassets represented by market prices, which normallychange with the passage of time
8/4/2019 Basic Concepts Session 2
9/17
7) Accrual Concept
it requires that revenue is recognized when
realized and expenses are recognized when they
become due and payable without regard to actualtime of receipt or payment of cash.This concept
requires adjustments of Prepaid and O/s exp. And
accrued and unearned revenue.
8/4/2019 Basic Concepts Session 2
10/17
8) Matching Concept
This concept is based on Acc. Period concept which
requires that there should be a periodic matching of
costs incurred and revenues earned during thatperiod.To compare profit or loss of a period it is
necessary to match exp. with revenue of that period
8/4/2019 Basic Concepts Session 2
11/17
9) Realization Concept-
This indicates that the amount of revenue to be
recognized is the amount that is reasonably certain
to be realised.
8/4/2019 Basic Concepts Session 2
12/17
8/4/2019 Basic Concepts Session 2
13/17
1) Conservatism
The Working rule is-
Anticipate no profits ,but provide for all possible
losses.It means,
- Do not consider gain untill it is realised
- Create provision for contingencies against current
years income for likely loss in value of assets andincurrence of liabilities.
For ex. Prov. For bad debts , disc. On debtors etc.
8/4/2019 Basic Concepts Session 2
14/17
2) Consistency-
It emphasizes the use of uniform accounting
practices consistently for similar items from year to
year, so that the results disclosed in the financialstatements will be comparable . For Ex. Method of
charging depreciation, valuation of inventory.
However it does not preclude desirable changes in
accounting procedures for better and meaningfulpresentation to decision makers, provided it should
be fully and separately disclosed.
8/4/2019 Basic Concepts Session 2
15/17
3)Materiality-
It requires that only the material significant details areto be disclosed and insignificant details are to be ignored.An item will be considered as material, if the knowledge
of that item influence the users of financial statements intaking decisions . Materiality depends not only onamount of an item but also on nature of info. , size ofbusiness , level of person requiring info. etc. For ex.Rounding off to nearest rupee , purchase of stationery
treated as consumables though they are in the nature ofassets , petty exp. clubbed together etc.
8/4/2019 Basic Concepts Session 2
16/17
4) Disclosure
This ensure full , fair and adequate disclosure ofbusiness transactions in financial reports which areprepared in conformity of generally accepted accounting
principles.Full nothing is omitted
Fair Acc. Principles are applied to report true and
fair view
Adequate anything which influences the decisionof user must be disclosed
The whole idea is to provide value added information to theuser to take informed decisions.
8/4/2019 Basic Concepts Session 2
17/17
Golden Rules of Accounting
Duality concept provides that every transaction hastwo sides the debit and the credit. Rules are
Nominal Account Debit all exp. and losses
Credit all incomes and gainsReal Account Debit what comes in
Credit what goes out
Personal Account Debit the Receiver
Credit the Giver
Top Related