Accounting Concepts and Conventions (Principles)

Accounting principles may be defined as those rules of action or

conduct, which are adopted
bytheAc c o u n t a n t s u n i v e r s a l l y w h i l e re c o rd i n g a c c o u n t i n
g t r a n s a c t i o n s . I n t e rn a t i o n a l Ac c o u n t i n g Standard (IAS) 1
defined Accounting principles as a body of doctrines commonly
associated with theory and procedures of Accounting, serving as
an explanation of current practices and as a
guidef o r s e l e c t i o n o f c o n v e n t i o n s o r p ro c e d u re s w h e re
a l t e rn a t i v e s ex i s t . To e n s u re a c c e p t a n c e , a c c o u n t i n g
principle must be capable of coping with practical
re c o rd i n g p ro b l e m , i t m u s t b e reasonably objective and
feasible, and it must not be expensive to apply and should
lead to similar answers in the hands of practitioners. Accounting
principles can be classified into two categories, namely,
accounting concepts and accounting conventions
Accounting Concepts
This refers to those basic assumptions or conditions upon
which the science of Accounting
is based. They are usually rules and conventions that lay down th
e way in which activities of a business are recorded. These
concepts are:1)
Business Entity Concept
: This concept states that every economic unit, regardless
of its legal form of existence, is treated as a separate
entity from parties having propriety or economic interest
in it. In Accounting, a business organization is considered
as a separatee n t i t y f r o m i t s p r o p r i e t o r ( s ) . T h i s c o n c
e p t i s a p p l i c a b l e t o a l l f o r m s o f b u s i n e s s organization
s.7
2)
Going-Concern Concept
: This is
the assumption that a business unit will continue to
operate into perpetuity; that is, the business is not
expected to liquidate in the foreseeablefuture.3)

Periodicity Concept
: According to this concept, the life of the business
is divided into appropriate periods for the purpose of
determining its results of operations. In accounting, s u c h a
segment or time interval is called accounting
p e r i o d , a n d i t i s u s u a l l y a y e a r. Though, a business
organization may produce quarterly or half yearly abridge
fi nancial statement, before the end of its fi nancial year, for
the purposes of planning, performance evaluation and
control.4)
Realization Concept
: This concept states that revenue is recognized when
transaction is c o m p l e t e d , w h e t h e r p a y m e n t i s re c e i v e d
o r n o t , t h a t i s i m m a t e r i a l . Fo r ex a m p l e i s considered
complete at the point when the property in goods passes to the
buyer and he/she becomes legally liable to pay.5)
Matching Concept
: This concept states that all the revenue earned and all
the expenses incurred in generating the revenue should be
matched together and reported for the period, with a view to
determining the net fi nancial position of the business.
Thus, all expenses incurred (whether they are actually paid
for or not) should be match against the revenue earned
(whether they are actually received or not).6)
Historical Cost Concept
: This concept states that the basis for initial acc
o u n t i n g recognition of all assets acquisitions, services
rendered or received, expenses incurred, creditors and
owners interests is the actual cost for the transaction(s).7)
Money Measurement
: This concept states that accounting is only concern with those
facts that can be measured in money terms with fair degree of
accuracy and objective.8)
Dual Aspect Concept
: This concept states that there are two aspects of accounting;
one is represented by the resources owned by a business and the
other by the claim against them. Double entry is therefore meant
to uphold this concept.
Accounting Conventions

These are approaches which are followed by the

Accountant in the application of the accounting concepts.
These include:1)
Conservatism/Prudence
: This convention states that greater care should be taken
in the recognition of profit and all known expenses, even those
that cannot be exactly determined, should be adequately
provided for in the accounts. In other words, when the Accountant
is faced with the problem of choice between alternative courses of
action, he should opt for a method that would understate, rather
than overstate the financial position of the business.2)
Materiality
: The principle holds that only items of material values are
accorded their strict accounting treatment. In other words,
materiality may affect the way an item is reported in the books of
account. An item is said to be material if its disclosure or nondisclosure can affect the judgments to be reached by a user on
the financial statements.3)
Consistency Concept
: This concept holds that when an enterprise has adopted a
method of treating an item or accounting transactions in the
books of accounts, it should continue to use that method in
subsequent periods so that comparison of accounting
fi gures over time c o u l d b e p o s s i b l e . T h u s , i t f o l l o w s
t h e re f o re t h a t , w h e re i t b e c o m e s n e c e s s a r y f o r a n y
method to be change, the Accountant should report the
reasons for such change and its implications on the financial
statements of the business.4)
Substance over Form
: This convention states that business transactions sh
o u l d b e accounted for and presented in accordance with their
substance and financial reality and not n e c e s s a r i l y w i t h t h e i r
l e g a l f o rm . I n o t h e r w o rd s , w h e re t h e re i s c o n fl i c t
b e t w e e n t h e financial reality of a transaction and its legal form,
the financial reality (i.e. the substance) should take precedence
over the legal form.8
SUSPENSE ACCOUNT AND CORRECTION OF ERRORS

Due to the imperfection of human beings, it is inevitable that

errors would exist in the accounting records. Although it may be
difficult to eliminate errors completed, however they can be
reduced to the barest minimum. To reduce errors in accounting
records, what should be done, among other measures, is to
engage the services of well trained personnel to maintain
accounting records.
3.1 Types of Book-keeping Errors
There are two types of book-keeping errors, namely :(a) errors
that do not affect the agreement of the Trial Balance; and(b)
errors that affect the agreement of the Trial Balance.
3.2 Errors Not Affecting the Agreement of the Trial Balance
These are errors that despite the existence, the trial balance
would still agree. They consist of the following:
(i)Error of Original Entry
This is an error in which a wrong fi gure (amount) is used to
observe correct double- entry.
For e x a m p l e , a s u m o f N 2 5 , 0 0 0 r e c e i v e d f r o m a D e
b t o r m a y b e w r i t t e n a s N 5 2 , 0 0 0 w h i c h i s subsequent
ly debited to the cash book and credited to the Debtors
account. This example is an error of transposition.(ii)
Error of Complete Omission
This is an error involving failure to post a transaction completely
into the relevant accounts, that is, no account is debited and no
account credited. This may be due to the loss of the source
document. For example, a purchase invoice may be misplaced as
a result of which it was not recorded in the purchases
day book causing the transaction not to be debited to purchases
account nor credited to the suppliers account.
(iii)Error of Principle
This is an error whereby a transaction is posted to the
wrong class of accounts. For example, the cost of office
furniture may be wrongly debited to office expenses account (an
account belonging to the class of nominal accounts) instead
of offi ce furniture account (an account belonging to the
class of real accounts).
(iv) Error of Commission
This is an error involving the posting of a transaction to a
wrong account within correct class of accounts. For example,

payment to a creditor named Auwal may be wrongly debited to

the account of another creditor named Awwal. Both names are
almost identical in spelling and both accounts, of course, belong
to the class of Creditors accounts.
(v)Error of Complete Reversal of Entry
This is an error involving the complete reversal of the
normal double-entry for a transaction. For example the
payment by cheque for salaries may be wrongly debited to
bank account, as well as, wrongly credited to salaries account.
(vi)Compensating Errors
This is a situation in which errors occurred in such a way
that by coincidence they cancel one another. For example,
the under cast of the debit side of cash book by, say
N25,500 would be cancelled out if, sales account is understated
by the same amount, i.e. N25,500.
3.3 Errors Affecting the Agreement of the Trial Balance
22
These are errors the existence of which would cause the Trial
balance not to agree. They consist of the following:
(i)

Error of Over or Under Cast

This is an error involving wrong addition of fi gures. For

example if the sales day book is wrong casted, the total of
credit sales posted to the credit side of sales accounts in
the ledger will be greater than or less than the actual figure,
thereby affecting the agreement of the Trial Balance.
(ii) Error of partial reversal of entry (Error of Misplacement)
This is an error involving reversal of one leg of the doubleentry for a transaction. For example, the double-entry for the
payment of wages in cash is: debit wages account, credit cash
account. If wages account is correctly debited but cash
account is also debited, this amounts to an error
of partial reversal of entry the reversal of the credit entry of th
e cash account. This error alwaysresults in the two legs of a
double-entry appearing on the same side, either both entries will
be on the credit side or both on the debit side, as in the

case of this example. To correct this error, the amount

involved would be doubled, and the correct entry observed
in the account in which the entry was reserved.
(iii) Error of Omission or Misstatement of Old Account Balance
This is the omission or misstatement of old account(s) balances,
i.e. balance b/d from the
previous period, thereby leading to less than the correct amount i
n the account and consequently affectingthe agreement of the
Trial Balance.
(iv)Error of Partial Omission
This is an error whereby one aspect of the double-entry for a
transaction is posted without posting the corresponding entry.
For example, where rents is paid in cash, and rent account
was credited but cash account entry was omitted, leading to one
leg in, one leg out. This type of error will affect the agreement of
the trial balance.
(v)Error of Omitting Journal Totals
If the totals in the journals (purchases, sales, return outwards or
return inwards) are not posted to the relevant accounts, the
balancing figures in the affected accounts would be wrong,
resulting in t h e d i s a g re e m e n t o f t h e t r i a l b a l a n c e . Fo r
ex a m p l e i f t h e t o t a l s a l e s f ro m t h e s a l e s j o u rn a l
i s N55,000 and that has not been posted to sales account, the
sales account figure will be less by the same amount, thereby
leading to the disagreement of the Trial Balance.
(vi) Error of Extraction
This is an error which results, as book-keepers extract (draw) trial
balance from the ledger account balances. The balances may be
correct but, but on extracting them to the trial balance, error may
be committed. For example cash account balance of N35,
000 was taken to the Trial Balance as
but N53,000. This error would cause the debit side of the trial bal
ance to be greater than the creditside. Extraction error is
usually an error of transposition leading to overcast or
under cast of theamount involved.(vii)

Error of Slide
Error of slide mostly results to overcast or under cast.
For example crediting a suppliers account with N54,000
instead of N45,000 is an error of slide or specifically error of
overcast and debiting machinery account with N26,000
instead of N62,000 is an error of slide or specifi cally error
of under cast. These types of errors affect the agreement of the
Trial Balance.
(viii) Error of Misplacing Ledger Balance
Aft e r b a l a n c i n g o ff l e d g e r a c c o u n t s , t h e b a l a n c e s a re
t o o h e t a ke n t o t h e re l e v a n t s i d e s o f t r i a l B a l a n c e .
While taking the balances to the trial balance, the
b o o k - ke e p e r m i g h t re c o rd a
d e b i t balance on the credit column of the trial balance and vice v
ersa. For example sales balance of N7,000 might be recorded on
the debit column instead of the credit column of the Trial
Balance.23
3.4Suspense Account
When a Trial balance does not balance and there is no time
or it is inconvenient to immediatelylocate and correct the
errors because the final accounts are urgently required, the Trial
balance
can be made to balance by inserting the balancing figure and des
cribing it as Suspense Account. Inother words, a Suspense
Account is an account created in order to make a disagreed
trial balance agree, by showing the diff erence in the
disagreed trial balance. For example, if the total of the
debit balances is greater than the total of the credit
balances, a suspense account is to be created and credited
with the difference in order to force the trial balance to agree. If
the Suspense account balance is a debit, it shall be
classifi ed as a current asset in the balance sheet while it
shall be classifi ed as a current liability if it is a credit
balance. Suspense account must however not be carried in
the books for an unreasonable length of time. The creation
of suspense account is just a temporary measure taken by a
bookkeeper pending the discovery of the mistake(s) or error(s)
that led to the disagreement in the trial balance. As soon as the

book-keepinge rro r s c a u s i n g t h e d i s a g re e m e n t o f t h e t r i a l
b a l a n c e t o t a l s a re d i s c o v e re d a n d c o rre c t e d , t h e suspen
se account would automatically close itself. In other words, the
only way Suspense Account can be eliminated is to locate and
correct the errors that necessitated its creation in the first place.
I n c l o s i n g t h e s u s p e n s e a c c o u n t a l l t h e e rro r s w h o s e
s e c o n d e n t r i e s a re n o t k n o w n a re t o b e recorded in it,
debit or credit side. The errors that are corrected through
suspense account are errors aff ecting the agreement of the
Trial Balance. As all the errors are corrected, the two sides
of the account, inclusive of the sundry error, would be equal,
thereby closing the Suspense Account. S u s p e n s e a c c o u n t i s
n o t re l e v a n t w h i l e c o rre c t i n g b o o k - ke e p i n g e rro r s t h a t
d o n o t a ff e c t t h e a g re e m e n t o f t h e t r i a l b a l a n c e . I t i s
h o w e v e r , n e c e s s a r y w h i l e c o rre c t i n g e rro r s a ff e c t i n g
t h e agreement of the trial balance. This is because, in
correcting those errors, it would be clear as to where the
first entry will go but, it would not be clear as to where the second
entry will go and, for that reason, suspense account is to stand for
the unknown account, receiving the second entry.
3.5 Entries Required to Correct Errors
A s m e n t i o n e d a b o v e , w i t h re s p e c t t o t h e fi r s t t y p e o f
e rro r s ( i . e . t h o s e t h a t d o n o t a ff e c t t h e agreement of the
Trial balance), they do not necessitate the creation of Suspense
Account because they do not cause the Trial balance not to
balance. For this reason, the double- entries needed to
correct these errors are not passed through the Suspense
Account. On the other hand, the second types of errors
cause the Trial balance not to agree and therefore
necessitate the creation of Suspense Account. Therefore,
double-entries made to correct such errors are passed
through Suspense Account so that after all such errors have
been corrected, the Suspense Account balance disappears.
3.5.1 Correction of Errors after Final Accounts Had Been Drawn
Up
Where final accounts had already been prepared before effecting
correction of errors, it would be necessary, in addition to the
entries to correct the errors, to;(a) reverse the values of the

balance sheet items affected by the errors; and(b) recalculate the

net profit obtained in the Profit and Loss Account.24