Accounting Principles,concepts
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Accounting Concepts and Principles Unit 2
Accounting Principles
Defined as those rules of action/ conduct, which are adopted by accountants universally while recording accounting transactions Classified into:
Concepts: basic assumptions/ conditions on which science of accounting is based Conventions: customs and traditions which guide the accountant while preparing accounting statements Accounting Policy: as adopted by management, at its discretion
Accounting Concepts
Business entity: business is separate, distinct legal entity from its owner, properties not to be mixed up, capital is hence a liability for business Going concern: business concern will exist for a fairly long time to come, into the foreseeable future; thus assets recorded at cost and not MP, provision for their replacements Money measurement: transactions involving money/ money’s worth will be recorded in books of the business; money is the common denominator for easy understanding/ comparisons
Periodicity Concept: time interval considered for preparation of accounts: accounting year, accounts sometimes prepared half-yearly, quarterly as well Accrual Concept: all incomes and expenses accrued in a year are considered for preparation of financial statements, whether or not actually paid/ received in that year
Basic Principles
Principle of Income Recognition: revenue is recognized when sale is made i.e. when property in goods is transferred to buyer and he becomes liable to pay Principle of expense: expense is different from payments: revenue expense is charged against profits and capital expense is shown as assets in B/S Principle of Matching Cost and Revenue: matching of revenues and expenses of a period, adjust outstanding and
Principle of Historical Costs: all assets are recorded at their cost of acquisition, which forms basis for their subsequent accounting as well Principle of Full Disclosure: of all material and relevant information; also required as per the Companies Act, 1956 Double Aspect Principle: business gives and receives benefits, both should match, thus assets = liabilities; for every debit, there is an equivalent credit; leads to double entry system of book keeping
Modifying Principle: cost of applying a principle should not be more than benefit derived from it Principle of Materiality: not to overburden statements with non material/ minute/ insignificant details Principle of Consistency: accounting practice once adopted should not be changed in next year(s), for easy comparison Principle of Conservatism/ Prudence: anticipate no profits but provide for all anticipated losses; make provisions for all expected risks
Accounting Standards
GAAP: Generally Accepted Accounting Principles Accounting Standards Board (ASB): by ICAI Systems of accounting:
Cash/ receipt basis Mercantile/ accrual basis Hybrid system
Accounting Principles
Defined as those rules of action/ conduct, which are adopted by accountants universally while recording accounting transactions Classified into:
Concepts: basic assumptions/ conditions on which science of accounting is based Conventions: customs and traditions which guide the accountant while preparing accounting statements Accounting Policy: as adopted by management, at its discretion
Accounting Concepts
Business entity: business is separate, distinct legal entity from its owner, properties not to be mixed up, capital is hence a liability for business Going concern: business concern will exist for a fairly long time to come, into the foreseeable future; thus assets recorded at cost and not MP, provision for their replacements Money measurement: transactions involving money/ money’s worth will be recorded in books of the business; money is the common denominator for easy understanding/ comparisons
Periodicity Concept: time interval considered for preparation of accounts: accounting year, accounts sometimes prepared half-yearly, quarterly as well Accrual Concept: all incomes and expenses accrued in a year are considered for preparation of financial statements, whether or not actually paid/ received in that year
Basic Principles
Principle of Income Recognition: revenue is recognized when sale is made i.e. when property in goods is transferred to buyer and he becomes liable to pay Principle of expense: expense is different from payments: revenue expense is charged against profits and capital expense is shown as assets in B/S Principle of Matching Cost and Revenue: matching of revenues and expenses of a period, adjust outstanding and
Principle of Historical Costs: all assets are recorded at their cost of acquisition, which forms basis for their subsequent accounting as well Principle of Full Disclosure: of all material and relevant information; also required as per the Companies Act, 1956 Double Aspect Principle: business gives and receives benefits, both should match, thus assets = liabilities; for every debit, there is an equivalent credit; leads to double entry system of book keeping
Modifying Principle: cost of applying a principle should not be more than benefit derived from it Principle of Materiality: not to overburden statements with non material/ minute/ insignificant details Principle of Consistency: accounting practice once adopted should not be changed in next year(s), for easy comparison Principle of Conservatism/ Prudence: anticipate no profits but provide for all anticipated losses; make provisions for all expected risks
Accounting Standards
GAAP: Generally Accepted Accounting Principles Accounting Standards Board (ASB): by ICAI Systems of accounting:
Cash/ receipt basis Mercantile/ accrual basis Hybrid system
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