Accounting Concepts

ACCOUNTING CONCEPTS AND CONVENTIONS. BY – ANIL KUMAR ARORA AKSHAY DHINGRA CHANDIGARH BUSINESS SCHOOL

ACCOUNTING CONCEPTS Accounting Concepts are the basic assumptions on which the accounting is based. There are 9 major Concepts : 1.BUSINESS

ENTITY CONCEPT : Business entity means a unit of organized business entity. A business entity is said to be separate and different from its owners.

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GOING CONCERN CONCEPT : According to this concept it is assumed that the business will continue for a fairly long time to come. There is neither the intention nor the necessity to liquidate the particular business venture in the foreseeable future.

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MONEY MEASUREMENT CONCEPT : The basic unit of measurement in accounting is Money. This concept has two major implications : Money is the only factor common to all business transactions.

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Only those transactions and events are to be recorded in the books of accounts which can be expressed in terms of money. COST CONCEPT : Cost is defined as the expenditure incurred for acquiring an asset or service. The principle states that the asset and services are recorded at their purchase cost and the accounting record should be based on cost rather than on current market value.

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REALISATION CONCEPT : The concept is very closely related to the cost concept. According to the concept, any change in the value of an asset should be recognized at the time the firm realised or disposes of the asset. This concept is strongly criticised as the value of an asset has been changing with the passage of time and the profit or loss arising out of the such asset couldnot be ascertained fairly.

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MATCHING CONCEPT : In order to determine the results of the business operations during the particular period the expenses of that period should be matched with the revenue earned during that period through the sale of goods or services. Sale of good has two aspects : A revenue aspect (revenue realised) An expense aspect (good have gone out of the business)

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DUAL ASPECT CONCEPT : According to this concept of accounting, every transaction has two aspects: Receiving Aspect Giving Aspect It means that every business transaction affects at least two accounts simultaneously. ACCOUNTING PERIOD CONCEPT : As per this principle, to ascertain the performance and the financial standing of the Business, the accounts are prepared on the annual

basis so that the position of the business could be known and new policies could be made accordingly. Generally, the financial year is taken for preparing accounts which is from 1st April to 31st March. 9.

ACCRUAL CONCEPT : Accrual implies earning an income(whether received or not) and incurring an expenditure(whether paid for or not) in accounting period. Accrual concept recognises income when it is earned rather then when it is collected. Similarly, recognises expenses when it is incurred rather then when they are paid.

ACCOUNTING CONVENTIONS Accounting Conventions consists of those customs or traditions which act as a guide to the accountant for the preparation of final statements. 1. CONSISTENCY : This convention states that once the company or any organisation has decided any method then it will continue using the same method unless it has a sound reason to change the method.

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CONSERVATION : This principle states that the accountant should not recognise any profit or gains till realised but should provide for all possible losses. It takes into consideration all probable losses but ignore all expected losses.

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MATERIALITY : Materiality implies that events of relatively small importance need not be given much importance. Thus, any transaction having significant effect on the business is material.

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FULL DISCLOSURE PRINCIPLE : All significant information relating to the economic affairs of the business organisation should be reported fully on the financial statements. All information should be honest as it helps the interested parties like creditors, investors and proprietors to take their decision.

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