Basic Accounting concepts and

convention
Principles satisfy:-
Utility or relevance
Objectivity
Feasibility
 Accounting Concepts
1. Business Entity Concept: the entity that
represents the association of person is
considered distinct and separate from the
owners, managers and employees of the
enterprise.
2. Going Concern Concept: it is assumed that the
business entity has continuity of life. It will
continue for indefinite period. It influences
accounting practices in relation to valuation of
assets and liabilities.
3. Money Measurement Concept: all business
transactions are measured, expressed and
recorded in terms of money. Important events
and strength and weaknesses of a firm which
cannot be measured in term of money are not
recorded in accounting.
4. Dual Aspect Concepts: Every business
transactions recorded in the books of accounts of
a business has two aspects- receiving of benefits
and giving of benefits. Both aspects of each
transactions must be recorded in appropriate
accounts.
Capital + Liabilities = Assets or
Capital= Assets-Liabilities
5. Accounting Period Concept or Periodicity
concept: A business unit may continue for an
indefinite period. It is possible to ascertain
overall profit or loss of the business when it is
liquidated. This concept helps to measure the
income generates during the specific
accounting period.
6. Cost Concept: here assets are recorded at the
price paid to acquire them. These assets are
gradually depreciated on the basis of cost and
the effective life of the assets.
7. Realisation Concept or Revenue recognition
concept:- here revenue is considered as
earned on the date when it is realised.
Realisation implies legal liability to pay by a
buyer.
8. Matching Concept: it is the matching of the
revenue and cost relevant to a specific profit.
9. Accrual Concept:- Revenue and cost are
accrued i.e. Recognized as they are earned or
incurred and not as the money received or
paid. Accounts maintained on cash basis
ignores the accrual aspect.
 Objective Evidence concept:- all accounting
entries are based on objective evidence-
objective refers to verifiability, reliability and
absence of bias. No transaction would be
recorded without verifiable documentary
evidence.
 Accounting conventions
Convention of full disclosure- all accounting
statements should be prepared honestly. Facts
and figures and the details which are of material
interest to the owners, investors, creditors must
be clearly presented in the financial statement.
Convention of consistency- Acc to this
convention, the rules, practices and concepts
used in accounting should be continuously
observed and applied year after year. E.g.
valuation of stock should be done in different
acceptable ways like average price method and
cost price method.
 Convention of Materiality- Materiality means
relative importance. All important items and
facts should be disclosed in accounting
statements
Convention of conservatism- Conservatism is
the defensive accounting mechanism against
uncertainty. E.g. stocks are valued at cost or
market price which ever is lower.
 Accounting Equations
Assets = Equities
Assets = Liabilities + Capital
Capital = Assets Liabilities
1. Capital: When capital is increased, it is credited, when
capital is withdrawn, it is debited.
2. Outsiders Liabilities: when liabilities increases outsiders
accounts are credited. When liabilities decreases their
accounts are debited.
3. Revenue Income: Owners equity is increased by the
amount of revenue
4. Revenue Expenses: Owners equity is decreased by the
amount of revenue expenses.
Give accounting equation for the following transactions
of Naresh for the year ended 31.12.10
1. Started business with cash Rs. 36,000
2. Paid rent in advance Rs. 800.
3. Purchased goods for cash Rs. 10,000 and on credit Rs.
4000
4. Sold goods for cash Rs. 8000 (costing Rs. 4800)
5. Rent paid Rs 2000 and rent outstanding Rs. 400
6. Bought a motor cycle for personal use Rs. 16,000
7. Purchased equipment for cash Rs. 1,000
8. Paid to creditors Rs. 1,200
9. Depreciation of equipment Rs. 50
10. Business expenses Rs. 800.
 Equities Assets
s.No Rent out Creditors Capital Cash Rent Stock of Equipme
paid in goods nts
advance
1 - - 36000 36000 - - -
-800 +800
2 - - 36000 3520 800 14000 -
4000 -10000
3 - 4000 36000 25200 800 14000
+3200 +8000 -4800
4 - 4000 39200 33200 800 9200
+400 -2400 -2000 -
5 400 4000 36,800 31,200 800 9200
-16000 -16000
6 400 4000 20800 15200 800 9200 +1000
-1000
7 400 4000 20800 14200 800 9200
-1200 -1200 1000
S.No Rent creditors capital cash Rent Stock of Equipme
outstanding paid goods nt
advance
8 400 2800 20800 13000 800 9200 1000
-50 -50
9 400 2800 20750 13000 800 9200 950
-800 -800

10 400 2800 19950 12200 800 9200 950

Rs. 23,150 Rs. 23,150