Basic Concepts

Accounting PrinciplesComprise a set of rules , concepts and guidelines used in preparation of financial accounting reports. Two Types: Acc. Concepts Acc. Conventions

 Acc. ConceptsIt is building block on which the entire acc. Structure rests . They are general ideas or notions . It is used to denote acc. Assumptions which are widely accepted and fundamental to the science of accounting . Following are Imp. Acc. Concepts 1) Business Entity Con. It is assumed that business has separate existence and its entity is different from that of its owners . Every transaction is analyzed from the point of view of a business enterprise and not that of person associated with it . Personal assets of the owners or shareholders are not considered in the books of accounts of the business.

 2) Money measurement concept

Only the monetary transactions which are capable of being expressed in terms of money are included in accounting records , and those which are not related are not recorded though they may be vital to the org . Ex.-Loyalty of employees, entrance of a competitor, quality of product etc. cannot be recorded . It ignores changes in the purchasing power of money and presumes that money remains constant. i.e. no effect of inflation.

3) Dual Aspect conceptEvery business transaction has two fold effect since the system of recording is based on double entry sys. Of book keeping . So For every Debit , there is a Credit . Assets = Owners Equity + External Liabilities. For ex. introduction of funds by owner also creates corresponding obligation for their repayment which is recorded as capital.

4) Going Concern conceptIt means that business activities will continue for a fairly long period of time , presuming the life of the business to be perpetual and no intention to liquidate the business in foreseeable future . Thus continuity of activity implies that assets are acquired for utilization and not for resale.

5) Accounting period conceptIt refers to span of time at the end of which financial statements are prepared . Though life of business is considered indefinite , to provide timely information ,keeping in view its usefulness to users, indefinite life of business is split into shorter intervals of time which are called accounting periods.

6) Cost Concept This concept lies an idea that: - the resources of the business are recorded in the books at the actual price paid to acquire them i.e.. the cost price, but it gets reduced in its value by the amount of depreciation charged. - this cost becomes the basis of accounting of the asset during the subsequent periods. The valuation does not reflect the current worth of the assets represented by market prices, which normally change with the passage of time

7) Accrual Concept it requires that revenue is recognized when realized and expenses are recognized when they become due and payable without regard to actual time of receipt or payment of cash.This concept requires adjustments of Prepaid and O/s exp. And accrued and unearned revenue.

8) Matching Concept This concept is based on Acc. Period concept which requires that there should be a periodic matching of costs incurred and revenues earned during that period.To compare profit or loss of a period it is necessary to match exp. with revenue of that period

9) Realization ConceptThis indicates that the amount of revenue to be recognized is the amount that is reasonably certain to be realised.

Accounting Conventions
It refers to the customs or traditions which are used as a guide in the preparation of meaningful information from the standpoint of various stakeholders . They have arisen more out of the application of various concepts. Conventions depends on concepts and not vice versa. They are as follows:

1) Conservatism The Working rule is Anticipate no profits ,but provide for all possible losses.It means, - Do not consider gain untill it is realised - Create provision for contingencies against current years income for likely loss in value of assets and incurrence of liabilities. For ex. Prov. For bad debts , disc. On debtors etc.

2) ConsistencyIt emphasizes the use of uniform accounting practices consistently for similar items from year to year, so that the results disclosed in the financial statements will be comparable . For Ex. Method of charging depreciation, valuation of inventory. However it does not preclude desirable changes in accounting procedures for better and meaningful presentation to decision makers, provided it should be fully and separately disclosed.

3)MaterialityIt requires that only the material significant details are to be disclosed and insignificant details are to be ignored. An item will be considered as material, if the knowledge of that item influence the users of financial statements in taking decisions . Materiality depends not only on amount of an item but also on nature of info. , size of business , level of person requiring info. etc. For ex. Rounding off to nearest rupee , purchase of stationery treated as consumables though they are in the nature of assets , petty exp. clubbed together etc.

4) Disclosure This ensure full , fair and adequate disclosure of business transactions in financial reports which are prepared in conformity of generally accepted accounting principles. Full nothing is omitted Fair Acc. Principles are applied to report true and fair view Adequate anything which influences the decision of user must be disclosed The whole idea is to provide value added information to the user to take informed decisions.

Golden Rules of Accounting

Duality concept provides that every transaction has two sides the debit and the credit. Rules are Nominal Account Debit all exp. and losses Credit all incomes and gains Real Account Debit what comes in Credit what goes out Personal Account Debit the Receiver Credit the Giver