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dy Notes: Business Finance & Accounting ounting concepts and conventions

rawing up accounting statements, whether they are external "financial accounts" or interna sed "management accounts", a clear objective has to be that the accounts fairly reflect the stance" of the business and the results of its operation.

theory of accounting has, therefore, developed the concept of a "true and fair view". The true view is applied in ensuring and assessing whether accounts do indeed portray accurately the busin vities.

support the application of the "true and fair view", accounting has adopted certain concepts ventions which help to ensure that accounting information is presented accurately and consistentl

ounting Conventions

most commonly encountered convention is the "historical cost convention". This requ sactions to be recorded at the price ruling at the time, and for assets to be valued at their orig .

er the "historical cost convention", therefore, no account is taken of changing prices in the econom

other conventions you will encounter in a set of accounts can be summarised as follows:

netary asurement

arate Entity

Accountants do not account for items unless they can be quantified in mone terms. Items that are not accounted for (unless someone is prepared to something for them) include things like workforce skill, morale, market leaders brand recognition, quality of management etc. This convention seeks to ensure that private transactions and matters relating to owners of a business are segregated from transactions that relate to the business


With this convention, accounts recognise transactions (and any profits arising f them) at the point of sale or transfer of legal ownership - rather than just w cash actually changes hands. For example, a company that makes a sale t customer can recognise that sale when the transaction is legal - at the poin contract. The actual payment due from the customer may not arise until sev weeks (or months) later - if the customer has been granted some credit terms.

An important convention. As we can see from the application of accoun standards and accounting policies, the preparation of accounts involves a h degree of judgement. Where decisions are required about the appropriateness o particular accounting judgement, the "materiality" convention suggests that should only be an issue if the judgement is "significant" or "material" to a user of accounts. The concept of "materiality" is an important issue for auditors of finan accounts. ounting Concepts


r important accounting concepts underpin the preparation of any set of accounts:

ng Concern



ching cruals") Characteristics of Accounting Information

Accountants assume, unless there is evidence to the contrary, that a company is going broke. This has important implications for the valuation of assets liabilities. Transactions and valuation methods are treated the same way from year to year period to period. Users of accounts can, therefore, make more meanin comparisons of financial performance from year to year. Where accounting poli are changed, companies are required to disclose this fact and explain the impac any change. Profits are not recognised until a sale has been completed. In addition, a caut view is taken for future problems and costs of the business (the are "provided for the accounts" as soon as their is a reasonable chance that such costs will be incur in the future. (or Income should be properly "matched" with the expenses of a given accounting peri

re is general agreement that, before it can be regarded as useful in satisfying the needs of var groups, accounting information should satisfy the following criteria: What it means for the preparation of accounting information


derstandability This implies the expression, with clarity, of accounting information in such a that it will be understandable to users - who are generally assumed to hav reasonable knowledge of business and economic activities


This implies that, to be useful, accounting information must assist a user to fo confirm or maybe revise a view - usually in the context of making a decision ( should I invest, should I lend money to this business? Should I work for this busines





This implies consistent treatment of similar items and application of accoun policies This implies the ability for users to be able to compare similar companies in same industry group and to make comparisons of performance over time. Much the work that goes into setting accounting standards is based around the need comparability. This implies that the accounting information that is presented is truthful, accura complete (nothing significant missed out) and capable of being verified (e.g. b potential investor). This implies that accounting information is prepared and reported in a "neutral" w In other words, it is not biased towards a particular user group or vested interest

OMTEX CLASSES THE HOME OF TEXT F.Y.B.Com THEORY F.Y.B.Com ACCOUNTING PRINCIPL ES. Accounting principles are guidelines & standards, which have been accepted by the accounting profession in preparation and presentation of accounts of the business. It is approved and normally accepted by the government bodies & controlling authorities. Accounting principles are uniform in order to understand in the same sense by those using it. Also they are not rigid (i.e. inflexible) like principle of gravity but they are flexible. This is because mainly the account principles are social science. Accounting principles are not universal and permanent as they are not discovered but are developed by man from time to time. Thus the development of accounting principles is a continuous process. Accounting principles are evolved over the year by following_ 1. The Professional Institutions like the INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA 2. The legislation of the country like_ COMPANY LAW BOARD (CLB) CENTRAL BOARD OF DIRECT TAXES (CBDT) etc. ACC OU NT IN GCON CE PT SANDCON VE NS IO NS . Accounting concepts: - An accounting concepts is a basic assumption concerning the economic environment in which accounting exists.

Characteristics of Accounting Concepts:1. Accounting concepts are continuously changing and evolving: In the event of rapidly changing economic activities, accounting concepts also undergo frequent changes. This is a healthy sign for the accounting fields. This is because of the following two main reasons. i. It is relatively a new field and hence it is developing with time. ii. Some aspects tend to change with the changes in social, economic and commercial conditions. 2. Another important feature of accounting concepts is the interrelationship among the different concepts. Most of the concepts do not stand by themselves; they depend on the other concepts to a large extent. Basic Accounting Concepts. 1.The Business Entity Concept:- Entity concept is an assumption that for an accounting purposes, the business is separate and different from that of its owners. The entity concept is also known as the concept of an Enterprise and is one of the central concepts in accounting.

The entity concept may be applied to the whole organization or even to the part of the organization. Thus according to these concepts the business is treated as separate unitfrom that of its owners, creditors, managers, employees and others. OMTEX CLASSES THE HOME OF TEXT F.Y.B.Com THEORY F.Y.B.Com

The entity concepts form the basic for recognition of the accounting concepts. 2. The Going Concern Concept:- According to this concepts an enterprises has an unlimited existence. Thus the concept of Going Concern Continuity can be exprssed as under. Unless & until there is evidence to the contrary, an enterprise must be considered as continuing largely in its present form and with its present purpose There are some undertakings (business) which are primarily for limited period. Such entities are exceptions. 3. The Money Measurement Concept: - The money measurement a concept is an assumption that any accounting transaction is to be measured in money or moneys worth. It is only when a transaction is measured that it can be recorded in the books of an enterprise and the result of the business is determined. Thus the measurement of a transaction also has to be in a common denomination (medium). Money is this common denominations in which transaction are recorded in the books of account. 4. The concept of Accounting Periodicity: - The determination of the income of the enterprise cannot be postponed till the end of the enterprise. Since, according to Going-concern concept there is no limit for the life of the enterprises. Hence the economic activities of the business must be recorded periodically. These period is called as Accounting period & these Accounting period is normally called as Accounting Year or Financial Year or Fiscal Year. It is, within this Accounting Year, that the income & expenses (i.e.) costs & revenues are matched with reasonable accuracy to provide significant results. 5. The Historical Cost Concept: - According to Historical cost concept, all the transactions are recorded in the books at

cost and not at its market value. Thus the underlying ideas of this concept are two forms. a. An asset is recorded at the price paid to acquire it i.e. at cost and b. This cost is the basis of all the subsequent treatment of the assets. e.g. depreciation, stock valuation, etc., 6. The Concept Of Matching Cost and Revenues: - Matching of Expired cost (i.e., expenses) and revenues for the periods determination of income, is one of the most important concept and procedures of accounting. This concept follows the accounting period concept i.e.once an accounting period is determined, within that period,the revenues and its related costs are matched. This concepts is one of the most important concept of accounting and has received major attention of accountants. Matching of costs and revenue is the Test reading of the results and the success of the business activity. At the same time, it is one of the most difficult accounting problems. OMTEX CLASSES THE HOME OF TEXT F.Y.B.Com THEORY F.Y.B.Com 7. The Accrual Concept The matching process as discussed above ultimately results in what is known as the Accrual concept. This concept is also called the Accrual theory of Accounting or Accrual Accounting It means a system of recording revenues and expenses of particular accounting period. Whether or not they are receive or paid in cash, at the time of accounting. It is also known as Mercantile System of Accounting as contrasted to Cash system of Accounting. In cash system of accounting, the revenues are recorded

onlywhen received, whether due or not. Payments i.e. expenses are also recorded irrespective of the fact whether they pertain to the period concerned or not. For matching of costs and revenue under accrual concept, all revenues related to current year, whenever received, and all costs of the current year, whenever paid, must be taken into account. Account ing conventions.

Home Book-keeping Functions of Accounting

Functions of Accounting:
Learning Objectives:

1. What are the important functions of accounting.

Record Keeping Function:

The primary function of accounting is to keep a systematic record of financial transaction - journalisation, posting and preparation of final statements. The purpose of this function is to report regularly to the interested parties by means of financial statements.

Protect Business Property:

The second function of accounting is to protect the property of business from unjustified and unwanted use. The accountant thus has to design such a system of accounting which protect its assets from an unjustified and unwanted use.

Legal Requirement Function:

The third function of accounting is to devise such a system as will meet the legal requirements. Under the provision of law, a business man has to file various statements e.g., income tax returns, returns for sales tax purpose etc. Accounting system aims at fulfilling the requirements of law. Accounting is a base, with the help of which various returns, documents, statements etc., are prepared.

Communicating the Results:

Accounting is the language of business. Various transactions are communicated through accounting. There are many parties - owners, creditors, government, employees etc, who are interested in knowing the results of the firm. The fourth function of accounting is to communicate the results to interested parties. The accounting shows a real and true position of the firm of the business.

Accounting Information can be twofold: 1) information for education and learning - there is a lot of accounting information aimed for different fields of accounting, including financial, management, cost, intermediate, advanced accounting and other. Such information is used for learning purposes and does not have relation with the accounting information about the business used for financial reporting purposes. ***Start mastering your accounting skills with Our Recommended Learning Materials. Click here to learn more...*** Another understanding of the accounting information is that it covers information used to prepare financial statements which report the results and financial position of a business to the decision makers.

Owners and management use this information to judge about the results of business operations and make decision about their management. External users like creditors, suppliers, tax authorities also use accounting information for their decision making, i.e. judging whether the business will be able to return loans, pay for goods sold, whether taxes are paid correctly, etc. To be useful and used accounting information must be be compliant with fundamental accounting assumptions and conventions.

It has to be: fair (correct) - present fairly and correctly results of operations and financial position of the business consistent - presentation and classification of items in the financial statements must be the same from one accounting period to the next prudent - accounting for certain items requires making judgments, these must be made with prudence to ensure assets or income are not overstated, liabilities or expenses are not understated material - material items must be disclosed separately, immaterial items can be aggregated into groups relevant - accounting information must be useful assisting users in their decision making process reliable - free from material mistakes and errors complete - presented without omission of material information comparable - providing ability to compare information through time and with other entities understandable - users without specific accounting knowledge must understand the accounting information To ensure the above characteristics each business must have people, accounting procedures, software to process information and control system to control all the process. All these means are called accounting information system.