Accounting concepts and conventions

1. Accounting
Concepts and
Conventions

2. Accounting
Concepts

3. The term ‘concept’ is used to connote
accounting postulates, that is
necessary assumptions and conditions
upon which accounting is based.
These are the theories on how and
why certain categories of transactions
should be treated in a particular
manner.

4. Business
Entity
Concept

5. BUSINESS ENTITY CONCEPT
• Business is treated as separate & distinct from
its members
• Separate set of books are prepared.
• Proprietor is treated as creditor of the business.
• For other business of proprietor different books
are prepared.

6. • The business and its owner(s)
are two separate entities

7. Hence…
The Books Of Accounts
are prepared from the
point of view of the
business

8. Capital (Liability)
Drawings (Asset)

9. The Personal Transactions of the
Owner are not recorded.
For Example:
A Car purchased by the owner for
personal use is not Recorded in the Books
Of Account Of the Business.

10. Going
Concern
Concept

11. GOING CONCERN CONCEPT
• Business will continue for a long period.
• As per this concept, fixed assets are recorded at
their original cost & depreciation is charged on
these assets.
• Because of this concept, outside parties enter
into long term contracts with the enterprise.

12. It is assumed that the entity is a
going concern, i.e., it will continue
to operate for an indefinitely long
period in future and transactions are
recorded from this point of view.

13. Money
Measurement
Concept

14. MONEY MEASUREMENT CONCEPT
• Transactions of monetary nature are recorded.
• Transactions of qualitative nature, even though
of great importance to business are not
considered.

15. In accounting, a record is made
only of those transactions or events
which can be measured and
expressed in terms of money.

16. Non monetary transactions are not
recorded in accounting.
Attitude Experience
Innovativeness
Honesty
Team work
Passion
skill

17. Accounting
Period
Concept

18. ACCOUNTING PERIOD CONCEPT
• Entire life of the firm is divided into time
intervals for ascertaining the profits/losses
are known as accounting periods.
• Accounting period is of two types- financial
year(1st Apr to 31st March) & calendar year(1st
Jan to 31st Dec).

19. • For taxation purposes financial
year is adopted as prescribed by the
Govt.
• Companies having their shares
listed on stock exchange publishes
their quarterly results.

20. For measuring the financial results
of a business periodically, the
working life of an undertaking is
split into convenient short periods
called accounting period.

22. Cost Concept

23. HISTORICAL COST CONCEPT
• Assets are recorded at their original price.
• This cost serves the basis for further accounting
treatment of the asset.
• Acquisition cost relates to the past i.e. it is
known as historical cost.

24. An asset acquired by a concern is
recorded in the books of accounts
at historical cost (i.e., at the price
actually paid for acquiring the
asset). The market price of the
asset is ignored.

25. Historical
Cost Of
Market
Value Of

26. Dual - Aspect
Concept

27. DUAL ASPECT CONCEPT
• Every transaction recorded in books affects at
least two accounts.
• If one is debited then the other one is credited
with same amount.
• This system of recording is known as
“DOUBLE ENTRY SYSTEM”.
• ASSETS = LIABILITIES + CAPITAL

28. For Every Debit,
there is a Credit
Every transaction should
have a two- sided effect to
the extent of same
amount

29. • Cash Account Rs. 10,000
Debit
• Sales Account Rs. 10,000
Credit
For Example:
Cash Sales Rs. 10,000

30. • Purchases Account Rs. 20,000
Debit
• Ram’s Account Rs. 18,000
• Discount Recd. Account 2,000
Credit
For Example:
Purchased From Ram goods worth Rs.
20,000 and discount received Rs. 2,000.

31. This Concept has resulted in
THE
ACCOUNTING
EQUATION

33. Realisation
Concept

34. REVENUE RECOGNITION/REALISATION
CONCEPT
• Revenue means the addition to the capital as
a result of business operations.
• Revenue is realised on three basis-:
1. Basis of cash
2. Basis of sale
3. Basis of production

35. Profit is earned when goods
or services are provided
/transferred to customers.
Thus it is incorrect to record
profit when order is
received, or when the
customer pays for the goods.

36. Matching
Concept

37. MATCHING CONCEPT
• All the revenue of a particular period will be
matched with the cost of that period for
determining the net profits of that period.
• Accordingly, for matching costs with revenue,
first revenue should be recognised & then costs
incurred for generating that revenue should be
recognised.

38. The matching principle ensures that
revenues and all their associated expenses
are recorded in the same accounting
period.
The matching principle is the basis on
which the accrual accounting method
of book- keeping is built.

39. For Example
Salary paid in 2012-13 relating to
2011-12
Such salary is treated as Expenditure for
2011-12 under Outstanding Salaries
Account, not for the year 2012-13

40. Accounting
Conventions

41. Accounting Conventions are the
common practices which are
universally followed in recording
and presenting accounting information
of business. It helps in comparing
accounting data of different business or
of same units for different periods.

42. Materiality

43. CONVENTION OF MATERIALITY
• According to American Accounting
Association, “An item should be regarded as
material if there is reason to believe that
knowledge of it would influence decision of
informed investor.”
• It is an exception to the convention of full
disclosure.
• Items having an insignificant effect to the user
need not to be disclosed.

44. Only those transactions,
important facts and items
are shown which are useful
and material for the
business. The firm need not
record immaterial and
insignificant items.

45. Illustration:
Company XYZ Ltd. bought 6 months supplies of
stationary worth $600.
Question:
Should the Company spread the cost of this stationary
for 6 months by expensing off $100 per month to the
income statement?
Answer:
Based on this concept, as the amount is so small or
immaterial, it can be expensed off in the next month
instead of tediously expensing it in the next 6 months.

46. Full
Disclosure

47. CONVENTION OF FULL DICLOSURE
• Information relating to the economic affairs of
the enterprise should be completely disclosed
which are of material interest to the users.
• Proforma & contents of balance sheet & P&L a/c
are prescribed by Companies Act.
• It does not mean that leaking out the secrets of
the business.

48. Financial Statements
and their notes
should present all
information that is
relevant and
material to the
user’s understanding
of the statements.

50. Conservatism

51. CONVENTION OF CONSERVATISM
• All anticipated losses should be recorded but all
anticipated gains should be ignored.
• It is a policy of playing safe.
• Provisions is made for all losses even though the
amount cannot be determined with certainity

52. Anticipate No Profits
but
Provide for all Losses
Accountant should
always be on side of
safety.

53. For Example
• Making Provision for Bad and Doubtful
Debts
• Showing Depreciation on Fixed Assets,
but not appreciation

54. Consistency

55. CONVENTION OF CONSISTENCY
• Accounting method should remain consistent
year by year.
• This facilitates comparison in both directions i.e.
intra firm & inter firm.
• This does not mean that a firm cannot change
the accounting methods according to the
changed circumstances of the business.

56. The accounting practices and
methods should remain consistent
from one accounting period to
another.
Whatever accounting practice is
followed by the business enterprise,
should be followed on a consistent
basis from year to year.

57. For Example
2009-10
• Straight
Line
Method
2010-11
• Written
Down
Value
Method
2011-12
• Units of
Measure
Method
Year
Method of
Depreciation
followed

58. Thank you