ACCOUNTING

CONCEPTS AND

CONVENTIONS

BY-:

PRIYASH 0129618
 ACNOWLEDGEMENT
We would like to thanks Ms.
Meenakshi Gupta (Lecturer) for
assigning this work & without her
guidance this work is not possible.
CONTENTS-:
Accounting Concepts……………
Meaning………
Types…………

Accounting Conventions……….
Meaning………
Types………….

Difference B/w Accounting

Concepts &
Conventions…………………..
 ACCOUNTING CONCEPTS -:
In order to make the accounting language
convey the same meaning to all people & to
make it more meaningful, most of the
accountants have agreed on a number of
concepts which are usually followed for
preparing the financial statements. These
concepts provide a foundation for accounting
process. No enterprise can prepare its
financial statements without considering
these concepts.
1) BUSINESS ENTITY CONCEPT
 Business is treated as separate & distinct
from its members
 Separate set of books are prepared.
 Proprietor is treated as creditor of the
business.
 For other business of proprietor different
books are prepared.
 2) MONEY MEASUREMENT
CONCEPT
 Transactions of monetary nature are
recorded.
 Transactions of qualitative nature,
even though of great importance to
business are not considered.
 3) GOING CONCERN
CONCEPT
 Business will continue for a long period.
 As per this concept, fixed assets are
recorded at their original cost &
depreciation is charged on these
assets.
 Because of this concept, outside
parties enter into long term contracts
with the enterprise.
 4) ACCOUNTING PERIOD
CONCEPT
 Entire life of the firm is divided
into time intervals for ascertaining
the profits/losses are known as
accounting periods.
 Accounting period is of two types-
financial year(1st Apr to 31st March)
& calendar year(1st Jan to 31st Dec).
 For taxation purposes financial
year is adopted as prescribed
by the Govt.
 Companies having their shares
listed on stock exchange
publishes their quarterly results.
5) HISTORICAL COST CONCEPT
 Assets are recorded at their original
price.
 This cost serves the basis for further
accounting treatment of the asset.
 Acquisition cost relates to the past
i.e. it is known as historical cost.
 JUSTIFICATION FOR
HISTORICAL COST CONCEPT
 This cost is objectively verifiable.
 Justified by going concern concept.
 Current values are difficult to
determine.
 Difficult to keep track of up down of
the market price.
 DRAWBACKS OF HISTORICAL
CONCEPT
 Assets for which nothing is paid will
not be recorded like reputation,
brand value, etc.
 Information based on historical cost
may not be useful to its members.
 6) DUAL ASPECT CONCEPT
 Every transaction recorded in books
affects at least two accounts.
 If one is debited then the other one
is credited with same amount.
 This system of recording is known
as “DOUBLE ENTRY SYSTEM”.
 ASSETS = LIABILITIES + CAPITAL
 7) REVENUE
RECOGNITION/REALISATION
CONCEPT
 Revenue means the addition to the
capital as a result of business
operations.
 Revenue is realised on three
basis-:
1. Basis of cash
2. Basis of sale
3. Basis of production
 8) MATCHING CONCEPT
 All the revenue of a particular period
will be matched with the cost of that
period for determining the net profits
of that period.
 Accordingly, for matching costs with
revenue, first revenue should be
recognised & then costs incurred for
generating that revenue should be
recognised.
 Following points must be considered
while matching costs with
revenue-:

1. Outstanding expenses though not paid in

cash are shown in the P&L a/c.
2. Prepaid expenses are not shown in the P&L
a/c.
3. Closing stock should be carried over to the
next period as opening stock.
4. Income receivable should be added in the
revenue & income received in advance
should be deducted from revenue.
 9) ACCRUAL CONCEPT
In this concept revenue is recorded
when sales are made or services are
rendered & it is immaterial whether
cash is received or not.
Same with the expenses i.e. they are
recorded in the accounting period in
which they assist in earning the
revenues whether the cash is paid for
them or not.
 10) OBJECTIVITY CONCEPT
Accounting transactions should be
recorded in an objective manner,
free from the personal bias of either
management or the accountant who
prepares the accounts. It is possible
only when each transaction is
supported by verifiable documents &
vouchers such as cash memos,
invoices.
 11) TIMELINESS
 This principle states that the
information should be provided to
the users at right time for the
purpose of decision making.
 Delay in providing accounts serves
no usefulness for the users for
decision making.
 12) COST BENEFIT PRINCIPLE
 Thisprinciple states that the cost
incurred in applying the principles
should be less than the profits
derived from them.
 ACCOUNTING CONVENTIONS
An accounting convention may be
defined as a custom or generally
accepted practice which is adopted
either by general agreement or
common consent among
accountants.
 1) CONVENTION OF FULL
DICLOSURE
 Information relating to the economic
affairs of the enterprise should be
completely disclosed which are of
material interest to the users.
 Proforma & contents of balance sheet
& P&L a/c are prescribed by Companies
Act.
 It does not mean that leaking out the
secrets of the business.
 2) CONVENTION OF
CONSISTENCY
 Accounting method should remain
consistent year by year.
 This facilitates comparison in both
directions i.e. intra firm & inter firm.
 This does not mean that a firm
cannot change the accounting
methods according to the changed
circumstances of the business.
 3) CONVENTION OF
CONSERVATISM
 All anticipated losses should be
recorded but all anticipated gains
should be ignored.
 It is a policy of playing safe.
 Provisions is made for all losses even
though the amount cannot be
determined with certainity
 4) CONVENTION OF
MATERIALITY
 According to American Accounting
Association, “An item should be regarded
as material if there is reason to believe
that knowledge of it would influence
decision of informed investor.”
 It is an exception to the convention of full
disclosure.
 Items having an insignificant effect to the
user need not to be disclosed.
DIFFERENCE B/W CONCEPTS &
CONVENTIONS
BASIS ACCOUNTING ACCOUNTING
CONCEPTS CONVENTIONS

EstablishedBy law Guidelines based

upon customs or
usage

Biasness No space for Biasness in

personal adoption
biasness in the
adoption
THE
END