Professional Documents
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Accounting Accounting
concepts conventions
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t is helpful in keeping business affairs strictly free
from the effect of private affairs of the proprietor(s).
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Amount invested by proprietor is shown as a
÷liability´ in the books of the business.
Amount paid for personal expenses of proprietor
are shown as drawings from capital of the
proprietor.
t is applicable to all forms of business
organisations
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Accordingly:
ig* assets are recorded
not liquidation value.
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on fixed assets is charged over the
expected lives.
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are amortized over appropriate period
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in the
preparation and presentation of financial statements.
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i t distorts the true worth of an asset by sticking to its
original cost.
iFinancial statements become irrelevant in case of inflation
iRemoves cost of fixed assets by writing off their cost while
asset may be in good condition
iAssets for which no payment has been made are not shown
e.g knowledge ,skill of uman Resources.
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When to record revenue and«
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When service has been rendered.
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nformation must
nformation must
be reasonably
be free from bias.
accurate.
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²ntries in accounting records and data reported
in financial statements must be based on
objectively determined evidence so as to be
reliable.
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Without this concept users of financial
statements would not have confidence in them.
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Accounting reports should disclose fully and
fairly the information they purport to represent.
Significant information should be disclosed in financial
statements.
Such disclosures can also be made through
footnotes.eg.about
icontingent liabilities
iMarket value of investmetns
iThe basis of valution of fixed assets, investments
and stock.
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Prudence is the ÷inclusion of a degree of
caution in the exercise of judgement needed
in making the estimates required under
conditions of uncertainty, such that assets or
income are not overstated and liabilities or
expenses are not under stated.´
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iPolicy of µcaution¶ & µplaying safe¶
iPolicy of safeguarding against possible losses in
world of uncertainty
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iAnticipated losses are shown in the form of
provisions.
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As a result of this convention :
© Revenues and gains are recognized only when
realized in form of cash or assets the ultimate
cash realization of which can be assessed with
reasonable certainty.
© Provisions must be made for all known
liabilities, expenses and actual and probable
losses.eg. Provision for doubtful debts is made
© Closing stock is valued at lower of cost and
market price.
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Consistency does
forbid introduction of
improved accounting
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The effect of the change (&
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of profit as compared
to the previous period) must be clearly
stated in the financial statements by way of
a note.
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A financial statement item is material: