advance level accounting concepts

1. ACCOUNTING
CONCEPTS
K.A CHARAKA JAYAMAL

2. Meaning
The business and its owner(s) are two separate
existence entity.
Examples
- Any private and personal incomes and expenses of
the owner(s) should not be treated as the incomes
and expenses of the business (Drawings and additional
capital)
- Use name of the organization
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BUSINESS ENTITY
K.A CHARAKA JAYAMAL

3. MONEY MEASUREMENT
Meaning
All transactions of the business are recorded in
terms of money
It provides a common unit of measurement
Examples
Market conditions, technological changes and the
efficiency of management would not be disclosed in the
accounts
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K.A CHARAKA JAYAMAL

4. HISTORICAL COST
Meaning
Assets should be shown on the balance sheet at the cost
of purchase instead of current value
Example
-The cost of fixed assets is recorded at the date of
acquisition cost.
-But in following situations ignore this concept,
• Revaluation of non current assets
• Stocks valued at net releasable values
K.A CHARAKA JAYAMAL

5. Accrual concept
Meaning
Accrual concept is the most fundamental principle of accounting
which requires recording revenues when they are earned and not
when they are received in cash, and recording expenses when they
are incurred and not when they are paid.
Example
- Accrued expenses
- advance income
- Credit sales
K.A CHARAKA JAYAMAL

6. REALIZATION
Meaning
Revenues should be recognized when the major
economic activities have been completed
• Sales are recognized when the goods are sold
and delivered to customers or services are
rendered.
Examples
- Goods sales
- Interest income
- Dividend income
K.A CHARAKA JAYAMAL

7. PRUDENCE/CONSERVATISM
Meaning
Accounting transactions and other events are sometimes uncertain but in order to
be relevant we have to report them in time. We have to make estimates requiring
judgment to counter the uncertainty. While making judgment we need to be
cautious and prudent. Prudence is a key accounting principle which makes sure
that assets and income are not overstated and liabilities and expenses are not
understated.
Examples
- Bad debts are probable in many businesses.
- Provision for doubtful debts
K.A CHARAKA JAYAMAL

8. GOING CONCERN
Meaning
The business will continue in operational existence
for the foreseeable future
Financial statements should be prepared on a going
concern basis unless management either intends to
liquidate the enterprise or to cease trading.
Examples
- Assets are divided as non current assets & current assets
- Liabilities divided as non current liability & current liability
K.A CHARAKA JAYAMAL

9. Periodic concept
Meaning
Although businesses intend to continue in long-term, it
is always helpful to account for their performance and
position based on certain time periods because it
provides timely feedback and helps in making timely
decisions.
Examples
-Financial statement are preparing annually
K.A CHARAKA JAYAMAL

10. CONSISTENCY
Meaning
- Companies should choose the most suitable accounting
methods and treatments, and consistently apply them
in every period
- Changes are permitted only when the new method is
considered better and can reflect the true and fair view
of the financial position of the company or if the standard is mentioned.
- The change and its effect on profits should be disclosed
in the financial statements.
K.A CHARAKA JAYAMAL

11. MATERIALITY
Meaning
- Immaterial amounts may be aggregated with the
amounts of a similar nature or function and need not
be presented separately
-Materiality depends on the size and nature of the item
Examples
-some expenses consider as capital expenses or capital expenses.
-Small payments such as postage, stationery and
cleaning expenses should not be disclosed separately.
They should be grouped together as sundry expenses
K.A CHARAKA JAYAMAL

12. MATCHING CONCEPT
Meaning
- Revenues are recognized when they are earned, but not
when cash is received
-Expenses are recognized as they are incurred, but not
when cash is paid
-The net income for the period is determined by
subtracting expenses incurred from revenues earned
Examples
-Annual sales match with cost of sales
K.A CHARAKA JAYAMAL

13. DISCLOSURE CONCEPT
Meaning
- Financial statements should be prepared to reflect a
true and fair view of the financial position and
performance of the enterprise
-All material and relevant information must be
disclosed in the financial statements
K.A CHARAKA JAYAMAL