ACCOUNTING PRINCIPLES “Principles of accounting are the general law or rule adopted - PowerPoint Presentation

1. ACCOUNTING PRINCIPLES “Principles of accounting are the general law or rule adopted or proposed as guide to action, a settled ground or basis of conduct or practice”. Accounting principles may be classified in to two categories. (A) Accounting concepts. (B) Accounting conventions. Accounting concepts- Accounting concepts are the fundamental assumptions on which transactions are recorded and financial statements are prepared. These concepts provide base for accounting process. While doing accounting use of these concepts are compulsory and they are not optional. More or less they are rigid and can not be changed.

2. ACCOUNTING CONCEPTSFOLLWING ARE THE CONCEPT OF ACCOUNTING:BUSINESS ENTITY CONCEPT- According to this concept , business and businessman are two separate entities. In other words business is separate and distinct from its owner. Business transactions are recorded in the accounting books from the business point of view and not from the owner’s point of view. Their account with the business are credited with the capital introduced and profit earn during the year etc. and debited by the drawing made. This concept is applicable to all form of business organisations.

3. ACCOUNTING CONCEPTSMONEY MEASUREMENT CONCEPT- According to this concept ,transactions and events that can be measured in term of money are recorded in the books of accounts. In other words, money is the common denominator in recording and reporting the transactions.GOING CONCERN CONCEPT- Going concern concept is the fundamental accounting concept. According to this concept it is assumed that business will continue for an indefinite period and there is no intension to close the business. For example huge money is invested on advertisement in expectation of future profit.

4. ACCOUNTING CONCEPTSACCOUNTING PERIOD CONCEPT- IT is also known as periodicity concept, life of an orgnisation is broken in to smaller periods e.g. 12 month so that its performance is measured at regular intervals. According to going concern concept business will run for indefinite period of time, the measurement of income and studying the financial position of the business after a very long period of time would not be very helpful in taking corrective steps at the appropriate time. Therefore it is necessary that after each segment of time interval, the management should review the performance. The segment of time period is called accounting period which is usually a year.

5. ACCOUNTING CONCEPTHISTORICAL COST CONCEPT- According to historical cost concept, an asset is recorded in the books of account at the price paid to acquire it and the cost is the basis for all subsequent accounting of the assets. Assets is recorded at the cost at the time of its purchase but it systematically reduces ii value by charging depreciation. The market value of an asset may change with the passage of time , but for accounting purpose it continues to be shown in the books of account at its cost.

6. ACCOUNTIG CONCEPTSDUAL ASPECT CONCEPT- According to dual aspect concept , every transaction has two aspects, a debit and a credit of equal amount. In other words every transaction has a two-fold effect. Every debit there is a credit of equal amount and vice versa. Because of this principles balance-sheet has two sides i.e. assets side and liability and they will always be equal at the end under any circumstances. So according to this concept. Total Assets = Total Liabilities or Total Assets = Internal Liability + External Liability Total Assets = Capital + Liabilities(external) Assets = Capital + Liabilities Capital = Assets - liabilities

7. ACCOUNTING CONCEPTSREVENUE RECOGNITION (REALISATION ) CONCEPT- According to this concept, any income is treated as earned or realised only when either it has been earned or its realization is certain. Amount is realised only when the goods and services are transfer to the customer. Only receiving of order is not treated as income realised. Example- If any order is received in April , goods are produces in May , It was deliver in June and its amount is realised in August, then according to this concept revenue will be treated as earned in the month of June when goods are delivered to customer. It should be noted that recognizing revenue and receipt of an amount are two separate aspects.

8. ACCOUNTING CONCEPTMATCHING CONCEPT- According to this concept a revenue will not be called as income unless it is matched with the expenses incurred to earn this revenue. It is very important to calculate correct profit/loss of a business during a specified period. It is necessary that revenue of particular period should be matched with that period of expenses. It means expenses should be recognised with the associated revenue of that particular period. ACCRUAL CONCEPT- It is necessary to do accounting on accrual basis rather than on cash basis for getting appropriate profit/ loss of the business. According to this accrual concept a transaction should be recorded at the time when it takes place and not necessarily at the time when the settlement takes place. In other words revenue should be recorded at the time when sale are made or service are rendered and not necessarily at the time when actual cash is received.

9. ACCOUNTING CONCEPTSVARIFIABLE OBJECTIVE CONCEPT- Objectivity means reliability ,trustworthiness and verifiability , which means that there is some evidence in ascertaining the correctness of the information reported. This concept holds that accounting should be free from personal bias. It means all accounting transactions should be evidenced and supported by business documents . These supporting documents are cash memo, invoices , sales bills etc., and provide the basis for accounting and audit.

10. ACCOUNTING CONVENTIONSAccounting conventions are generally accepted practices or principles or guidelines which are based on custom ,usage or general agreement. Like concepts they are not rigid or not established by law . So they can be changed according to requirements but not very frequently. While following conventions , personal judgment also plays an important role so it not necessary that different organization adopt the uniform conventions. Following are the main conventions.FULL DISCLOSURE CONVENTION- According to this convention all material and significant information related with financial transactions of an organization should be fully/completely disclosed. Such information is normally disclosed by way of notes to annual account . For example , along with the assets ,its mode of valuation should also be disclosed

11. ACCOUNTING CONVENSIONSCONSISTENCY CONVENTIONS- This convention is useful and appropriate for making comparison in statements of different organization of the same industry or the same organization for different years. According to this convention the policies and methods adopted in one year should be consistent year after year so that important conclusion and decisions can be made about the performance of the organization. For example- Different methods are available for charging depreciation on fixed assets the method adopted by enterprise in one accounting period will be consistent in next accounting periods. Being a convention it can not be rigidly followed . So if it is justified to change the method for better performance and result of a business the organization can change its method but due note should be given by way of footnote after preparing financial statements of an accounting period.

12. ACCOUNTING CONVENTIONSCONSERVATISM CONVENTION OR PRUDENCE- According to this convention business should not be enthusiastic about the future profit but should be conscious about the expected losses and make provision for anticipated losses. Provision for the expected losses should be made in advance whether amount is known or unknown. Being a convention it is not rigidly followed because too much provision for future losses may disclose lower profit than actual and there may be under-statement of assets and overstatement of liabilities due to which there may be a creation of secret reserves.

13. ACCOUNTING CONVENTIONSMATERIALITY CONVENTION- According to this convention only material items should be disclosed and all the immaterial/insignificant item should be ignored or should be merged with other items. This convention is contradictory of full disclosure convention . More over an item may be significant for one organization and may be insignificant for another organization. Being a convention it is not rigid that which item is material/significant and which one is insignificant so personal judgment is used to decide the same.