CONCEPTS
AND CONVENTIONS OF ACCOUNTING
Definition
of Accounting:
Accounting is the art of recording,
classifying and summarizing events or transactions in terms of money and
interpreting the results thereof.
Type
of Accounts:
1. Nominal Account: Dr. All Expenses and Losses
Cr.
All Income and Gains
2. Real Account: Dr. What Comes in
Cr.
What Goes Out
3. Personal Account: Dr. The Receiver
Cr.
The Giver
ACCOUNTING CONCEPTS:
Definition:
Accounting concepts
are fundamental thoughts or ideas that underlines or give guidelines to the
theory and practices of Accounting.
Different Concepts of Accounting:
- Money Measurement Concept: This concept means in accounting a record is made only of those events or transactions which can be measured or expressed in terms of money.
Non monetary events which cannot be measured and
expressed in monetary terms are ignored.
Eg: Retirement of
managing director, quality of the goods and services of the organization.
- Separate Entity or Business Entity Concept: This concept means that a business undertaking or unit is treated or regarded as different and distinct from its owners or contributors.
Hence under the eyes of law, the owners and the business
are two separate entities. Who are capable of entering into transactions with
each other.
The books of accounts show only those transactions which
are in the nature of business.
3.
Going Concern Concept
/ Continuity Concept: This concept means that a business will continue to
exist and carry on its business operations for an indefinite period in the
future.
It implies that an organization has no intention of
winding up in the future. The assumption is that the fixed assets are not for
the purpose of resale.
- Cost/Historical Cost Concept: This concept implies that the fixed assets are to be recorded at the price at which it was acquired i.e., cost price.
The market values of such fixed assets are ignored. This
concept is based on the principle of objectivity and it prevents giving of an
arbitrary value to any fixed asset.
- Dual Aspect / Equation / Accounting Equation Concept: This concept emphasizes that every business transaction always result in the receiving of some value and the giving of some other benefit of equal value i.e., 2 aspects of a transaction. This is also known as double aspect of accounting. For eg:- When a business purchases goods for cash. It receipts goods of some value and imports cash of the equal value.
- Accounting Period Concept: This concept means that for measuring the financial results of a business periodically the business life of a concern is divided into convenient short periods of time called accounting periods. The profit or loss and the financial position is ascertained at the end of the accounting period by preparing the financial statement.
The accounting period is generally one year. It may be
Calendar year 1st Jan to 31st Dec. or financial year 1st
April to 31st March.
- Realisation Concept: This concept emphasis that profit should be considered only when it is realized. According to sale of goods act revenue is earned only when the goods are transferred.
Profit is deemed to have accrued, when the property in
good passes to the buyer i.e., when sales are affected and the customer becomes
liable to pay.
- Accrual Concept: This concept implies that when an event or transaction is entered into its consequences will certainly follows for instance, ABC company borrows loan of Rs. 10,000 at 12% P.A. from SBI on 1st April 2002.
The consequence of this transaction is that he will have
to pay an interest of Rs. 1,20,000 at the end of the year i.e., Interest
becomes payable.
This concept is concerned with the expected future cash
receipts and payments. Eg:- Wages, Salaries, Rent, Interest, etc.
- Objective Evidence Concept: This concept means that all the accounting entries should be evidenced and supported by source documents such as invoices, vouchers, etc.
This leads to no bias or fraud and the accounts as well
as the source documents must be subject to certification by Auditors.
10.
Matching Concept: Profit is the result
of 2 factors i.e., 1) Revenue 2) Expenses.
This concept states that only expenses and revenues
occurring in respect to a particular financial year is taken into account for
that particular period.
This concept requires the proper recognition and
allocation of revenues and expenses.
Conventions
of Accounting
- Convention of Conservatism: This convention is an convention of caution or prudence or the policy of playing sale. This convention implies that in the accounting records and the financial statements of a business the prospective losses, risk and uncertainties should be taken note of and provided for, but prospective profits should be ignored “provide for all possible losses but anticipate no profits”. Eg:- Closing stock is valued at cost price or market value which ever is lower. Reserve for bad debts, provision for discount, provision for tax, etc. are made. The nationals behind this convention is that the future is uncertain.
- Convention of Consistency: This convention that the accounting practices and methods should be consistent from one accounting year to another. For instance, the depreciation method valuation of stock and the treatment of deafened revenue expenditure. The idea behind this convention is that there will be no difficulty in comparing the financial statements year after year. It will also enable that the financial records to show a true picture.
- Convention of Full Disclosure: This convention means that the material facts must be disclosed, in the financial statement with sufficient details.
For instance, Investments not only the various securities
held by the concern, but also the more of valuation should be disclosed.
Fixed Assets – should disclose the cost of acquisition,
the depreciation method and the amount of depreciation written of to date.
Contingent liabilities of the business organization
should also be disclosed in the financial report.
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