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Accountin
g
Principles
Accountin
g
Concepts
Accountin
g
Conventio
ns
Accounting Concepts
Concept denotes the logical consideration which is generally and widely
accepted. The term is not used in the sense of a set of hard and fast rules but
rather of rules of general application which helps in the selection of
accounting methods and provides the foundation of the accounting. Various
concepts and their implications are described below:
1. Basic Entity Concept: - According to this concept, in accounting,
business unit or entity is treated different or distinct from its owners not
in the case of Joint Stock Company but also in the case of sole
proprietorship and partnership firm as well.
Implication of the above concept is that the owner and the business are
treated as two different and distinct entities and we record the
transactions from the view point of business. This explains why capital
contributed by the owner is shown as a liability in the balance sheet of
the business.
equation which states that at any point of time the assets of any entity
must be equal (in monetary terms) to the total of owners equity and
outsiders liabilities. This may be expressed in the form of equation:
A L= P
A= L+ P
Thus, it emphasizes that the proprietory claim is the balance after
providing for outsiders claims against the business from the total assets
of the business.
7. Revenue Recognition (Realization) Concept: - This concept
emphasizes that profit should be considered only when realized. Profit is
deemed to have accrued when property in goods passes to the buyer i.e
when sales are effected.
Implication of the concept of realization flows from the convention of
conservatism. It implies that accounting should take into consideration
profits only when the same have been realized. No anticipated profit
should be taken credit of.
8. Matching Concept: - The concept of matching requires that expenses
should be matched to the revenues of the appropriate accounting period is
the basis for determining the net profit. So we must determine the
revenues earned during a particular accounting period and the expenses
incurred to earn those revenues.
Implication of this concept is that meaningful information can be
ascertained relating to the profits of any entity only if the revenues of the
same accounting period are matched against the expenses of the same
accounting period. For example ,salary paid in January 1998 relating to
December 1997 should be treated as the expenditure for 1997 and not
1998.
9. Accrual Concept: - Accounting attempts to recognize non-cash events
and circumstances as they occur. Accrual is concerned with recognizing
assets ,liabilities or income from amounts expected to be received or paid
in future .Thus, we make record of all expenses and incomes relating to
the accounting period whether actual cash has been disbursed or received
or not. Common examples of accruals include purchase and sale of goods
or services on credit, interest outstanding, etc.
ACCOUNTING CONVENTIONS
An accounting convention is a modus operandi of universally accepted
system of recording and presenting accounting information to the concerned
parties. Conventions are based on customs and practability, which may have some
logic behind its usage. . Accounting conventions help in comparing accounting
data of different business units or of the same unit for different periods. These have
been developed over the years.
1. Convention of Materiality or Relevance: The convention of Materiality
emphasizes the fact that only such information should be made available by
accounting that is relevant and helpful for achieving its objectives. The relevance
of the items to be recorded depends on its nature and the amount involved. It
includes information, which will influence the decision of its client. This is also
known as convention of materiality. For example, business is interested in knowing
as to what has been the total labour cost. It is neither interested in knowing the
amount employees spend nor what they save.
2. Convention of objectivity: The convention of objectivity highlights that
accounting information should be measured and expressed by the standards which
are universally acceptable and every transaction which is recorded in the
accounting should be based on some documentary evidence which are cash
memos, invoices, bills and vouchers. For example, unsold stock of goods at the end
of the year should be valued at cost price or market price, whichever is less and not
at a higher price even if it is likely to be sold at a higher price in the future.
price, whichever is lower. The effect of the above is that in case market price has
come down then provide for the 'anticipated loss', but if the market price has
increased then ignore the 'anticipated profits'. The convention of conservatism is a
valuable tool in situation of ambiguity and qualms.