PREPARED BY:-Raval Gopika Hirpara Sandhya Dr.

J K Patel Institute Of Management

The process of converting the financial transaction into financial statement is rued by principles called accounting concepts and convention.
The importance of study of the basic concepts and conventions of accounting has been described by S.H.Bhattacharya and john Deardenin their books of accounting for management

 The term concept means accounting postulates

Concept

Idea,notion,thought,&perception Rues of accounting that are followed in preparation of all account & financial statement.

Business Entity concepts

Business is treated as separate and differ from its member

Proprietor is treated as creditor of the business

EXAMPLE:A has 3 rooms in a house he has rented for RS.3,000 per month. He has setup a single-member accounting practice and uses one room for the purpose. Under the business entity concept, only 1/3rd of the rent or RS1,000 should be charged to business, because the other 2 rooms or RS2,000 worth of rent is expended for personal purposes.

Money measurement concept

Transactions of monetary nature are recorded

Transactions of qualitative nature, even though of great importance to business are not considered

Example:Suppose an Organization produce a product and, sale the product in the market earned profit than the profit is recorded in the books of the account but, in the organization efficient managers are more valuable persons for the company due to their efficiency company can get more profit but we can not recorded their efficiency in the books of account.

 Business will continue for a long period

As per this concept fixed assets are recorded at their original cost and depreciation is charged on these assets

For Example:

-where the venture is for a specific purpose like setting up a stall in an

exhibition or fair or the construction of a building or bridge etc. under a contract, the business comes to an end on the completion of the project

 entire life of the firm is divided into time intervals for ascertaining the profit or loss are known as accounting periods.

Accounting period is of two typesFinancial year (1st April to 31st March) Calendar year (1st Jan. to 31st Dec.)

 Assets are recorded at their original price Acquisition cost relates to past i.e. it is known as historical cost Example:-

100 units of an item when purchased one month back for Rs. 10 par unit, the price today is Rs. 11 par unit so in the balance sheet it is recorded Rs. 1000 and not Rs. 11000.

Dual aspect concept

Every transaction recorded in books affects at least two accounts One is debited and other one is credited with same amount

Example:Smita purchase a goods of Rs. 5000 from J.K & sons company. purchase a/cdr 5000 To J.K & Sons Co 5000

Example:

This concept state that revenue from any business transaction should be included in the accounting ,recorded only when it is realized Revenue is said to have been realized when cash has been received
i. When the goods are produced ii. When an order is received from a customer iii. When the goods are delivered to a customer and accepted by him iv. When cash is received from the customer

Matching concept
All the revenue of the particular period will be matched with the cost of that period for determining net profit of that period Income should be proper matched with the expenses of given accounting period

Revenue are recognised when that become receiveble though cash is receive or not

same with expenses are recognized when that become paid though cash is paid or not

Convention
It anticipate all probable loss but not provide for probable profit

Habits, practices
This requires transaction to be recorded at the price ruling at the time, and for assets to be valued at their original cost

Information relating to the economics affairs of the enterprise should be completely discoursed which are of material interest to the users Contents of balansheet &p&L a/c are prescribed by companys Act

Convention of consistency
Accounting method should remain consistent year by year
This does not mean that a firm can not change the accounting methods according to the changed circumstances of the business

All anticipate losses should be recorded but all anticipated gain should be ignored
Provisions is made for all losses even though amount can not been determined with certainty

Convention of materiality
According to the convention of materiality only those transaction, important facts &items are shown which are useful & material for the business Items having insignificant effects to the user need not to be disclosure

BASIS

CONCEPTS

CONVENTION

ESTABLISHED

By law

Guidelines based upon customs or usage Biasness is adoption No uniform adoption

BIASNESS

No space for personal biasness in adoption Uniform adoption

UNIFORMALITY

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