ACCOUNTING

CONCEPTS AND
CONVENTIONS

CONTENTS-:

Accounting Concepts
Meaning
Types
Accounting Conventions.
Meaning
Types.
Difference B/w Accounting
Concepts &
Conventions..

ACCOUNTING

CONCEPTS

-:

In order to make the accounting language

convey the same meaning to all people & to
make it more meaningful, most of the
accountants have agreed on a number of
concepts which are usually followed for
preparing the financial statements. These
concepts provide a foundation for accounting
process. No enterprise can prepare its
financial statements without considering
these concepts.

1) 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.

2) MONEY MEASUREMENT
CONCEPT
Transactions

of monetary nature are

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

3) 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.

4) 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 typesfinancial year(1st Apr to 31st March)
& calendar year(1st Jan to 31st
Dec).

5) 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.

6) 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

7) REVENUE
RECOGNITION/REALISATION
CONCEPT

1.
2.

Revenue means the addition to the

capital as a result of business
operations.
Revenue is realised on following
basis-:
Basis of cash
Basis of sale

8) 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.

Following points must be considered

while matching costs with
revenue-:
1.
2.
3.
4.

Outstanding expenses though not paid in

cash are shown in the P&L a/c.
Prepaid expenses are not shown in the
P&L a/c.
Closing stock should be carried over to
the next period as opening stock.
Income receivable should be added in
the revenue & income received in
advance should be deducted from
revenue.

9) ACCRUAL CONCEPT
In this concept revenue is recorded
when sales are made or services are
rendered & it is immaterial whether
cash is received or not.
Same with the expenses i.e. they are
recorded in the accounting period in
which they assist in earning the
revenues whether the cash is paid for
them or not.

10) OBJECTIVITY CONCEPT

Accounting transactions should be
recorded in an objective manner, free
from the personal bias of either
management or the accountant who
prepares the accounts. It is possible
only when each transaction is
supported by verifiable documents &
vouchers such as cash memos,
invoices.

11) TIMELINESS
This

principle states that the

information should be provided to
the users at right time for the
purpose of decision making.
Delay in providing accounts serves
no usefulness for the users for
decision making.

ACCOUNTING CONVENTIONS
An accounting convention may be
defined as a custom or generally
accepted practice which is adopted
either by general agreement or
common consent among
accountants.

1) 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.

2) 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.

3) 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

4) 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.

DIFFERENCE B/W CONCEPTS &

CONVENTIONS
BASIS

ACCOUNTING ACCOUNTING
CONCEPTS
CONVENTION
S
Establishe By law
Guidelines
d
based upon
customs or
usage
Biasness

No space for
Biasness in
personal
adoption
biasness in the
adoption