Accounting - Concepts and Conventions

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NATURE OF FINANCIAL STATEMENT

The data exhibited by financial statements are affected by
a)Recorded facts
b)Accounting Concepts, Conventions & Principles
c)Personal Judgment

1)Recorded Facts: The term recorded facts means the data used for preparing financial statements are taken from accounting record which are facts.
i.e. Cash in Hand: Actual cash is recorded
Amount due from debtor: Actual to be recorded
Amount due to creditor: Actual to be recorded

Thus the financial statement do not disclose such facts which may be reality, which are not recorded.

For ex.: L/Bldg. purchased are shown at cost price in the Accounting Books But market value which in reality may be different is not stated because it is not recorded in Books of A/c.

2)Accounting concepts & conventions & principle: The Dictionary meaning is “Fundamental truth implying uniformity of Applicability everywhere.”

However when applied in Financial Statement Analysis, it gives different meaning in different concepts & so it is rarely used as a fundamental accounting truth.

Accounting Principles are those rules of Action which are adopted by the Accountant universally in recording transaction.

Different professional bodies like Australian Society of Account (i.e. Institute of Chartered Accountant in Australia) The Institute of Chartered Accountant in England & Wales. The American Institute of certified public accountant have made recommendation on accounting principles in the recent year.

Accounting principles have been developed over the years from experience, usage & necessity. They are judged on the General Acceptability rather than Universal Acceptability to the user of financial statement hence they are called as General Accepted Accounting Principles (G.A.A.P.)

According principles can be broadly classified into two categories: A.Accounting concepts
B.Accounting Conventions

Accounting Principles

Accounting conceptsAccounting Conventions

a)Entity Concepta)Disclosure
b)Going Concern Conceptb)Materiality
c)Accounting period conceptc)Consistency
d)Money Measurement Conceptd)Conservatism
e)Cost Concept
f)Cost Attach Concept
g)Dual Aspect Concept
h)Accrual concept
i)Periodic Matching of cost and
Revenue Concept
j)Realisation Concept
k)Verifiable Objective Evidence Concept

ACCOUNTING CONCEPTS:

They are the necessary assumptions or conditions upon which accounting is based. Accounting concepts are postulates, assumptions or conditions upon which accounting is based. They are developed to convey the same meaning to all people. Some of the important concept are given as follows:

1.Entity Concept: For accounting purposes- the ‘business’ is treated as a separate entity from the proprietor (s). It may sound to be absurd that one sell goods to himself, but all transactions are recorded in the books of the business as per this point of view. This concept helps in keeping private affairs of the proprietor away from the business affairs. Thus if a proprietor invests Rs.1,00,000/- in the business, it is deemed that the proprietor has given Rs.1,00,000/- to the ‘business’ and it is shown as a ‘liability’ in the books of business. (because business has to ultimately repay it to the proprietor). Similarly, if the proprietor withdraws Rs.10,000/- from the business, it is charged to him.

This concept is applicable to all forms of business organizations. Although in the eyes of Law a Sole trader and his business or the partner and their business are one and the same, for accounting purposes they are regarded as separate entities. It is the ‘business’ with which we are concerned.

2.Going Concern Concept (Continuity of Activity): It is assumed that the business concern will continue for a fairly long time, unless and until it has entered into a state of liquidation.

3.Accounting Period Concept: Although the ‘going concern’ concept...
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