ACCOUNTING CONCEPTS AND CONVENTIONS: Accounting concepts are considered to be self-evident still they are useful if one wants

to understand current accounting system prevailing. Following are the accounting concepts used: 1) The money measurement concept: In financial accounting, the transactions which can be recorded in terms of money are recorded. The benefit of this is that though all heterogeneous items are involved in the business, they can be quantified in terms of money and all the additions, subtractions can be made and also can be recorded at the same place. There is a limitation to this concept that is it imposes a severe limitation on the scope of financial reporting in the accounting report. Not all facts can be expressed in the financial statements. Facts like human assets, placing of a better product by one of the competitors, ill health of the key persons in an organization etc. cannot be recorded either in the profit and loss account or in the balance sheet. 2) The Entity concept: Books of accounts are kept for the entities and not for the persons who are associated with them. An entity for that matter can be any organization or an activity for which the set of accounts are prepared. Under law, there is no distinction between the owner and its business especially in case of a partnership or a sole trading. Creditors can sue the owners if the business doesnt have sufficient assets to pay off its liabilities. This is not the case with accounts. As per this concept, business is different from its owners. A set of accounts is to be kept for the business and not for the owners. It is for this reason that anything withdrawn by the owner for his personal use will be treated as drawings and the firm has a right to collect it from the owner. 3) The Going concern concept: Under this concept the organization is considered to keep its operations running for a forceable future or for a considerably longer period of time. It is for this reason that the organization does not constantly value its worth to the potential customers, but, it will be valued at cost or its current value. If the accountant is of the opinion that the organization should be liquidated then the assets will be valued at its current market price. 4) The Cost concept: The economic resources of organization are called as Assets. These assets are divided into monetary or non-monetary. The non-monetary assets are the ones whose cash value is not fixed by contract like land, buildings, machinery and other similar assets. Monetary assets are the assets whose value is fixed by contract like money and marketable securities. This concept is quite closely related to the going concern concept. Because we say that the firm is going to be running for a forceable future, we value all the non-monetary assets at the price for which it was purchased i.e. the cost of that asset till a new asset is purchased. All the monetary assets subsequent to their acquisition will be valued at their fair value i.e. the value if those assets were to be willingly sold in the market.

5) The Dual Aspect Concept: The economic resources of an organisation are called as Assets. The claims of various parties to these assets are called liabilities. These claims may be of the parties like creditors or they may be claims of the owners. As all the assets are claimed by someone, we get an accounting equation as: Assets = Liabilities This is the fundamental equation of accountancy. It can be expanded as follows: Assets = Capital + Other liabilities It can be further simplified as: Fixed assets + cash + debtors + bills receivable + prepaid expenses + outstanding income + Stock + Investments = Capital + Creditors + Outstanding expenses + Loan + Prepaid income. 6) The Accounting Period Concept: In going concern concept, we assume life of the company as indefinite. In such a situation, it will be very easy to find out income of any organization for its entire life. But, businessmen are not ready to wait till that period. They need to know the financial position of their organization at appropriate intervals. For this very objective we have the concept of accounting period. This concept makes it necessary to measure firms activities at a specific interval of time which is normally one year as also called one financial year. The expenses whose benefit is going to extend for more than one year is classified as an asset and the one whose benefit is already availed or is limited within that year is considered as an expense. Similar is categorization done for the credit balances. 7) The Conservatism Concept: The Financial Accounting Standards Board says, prudent reporting based on a healthy skepticism builds confidence in the results and, in the long run, best serves all of the divergent interests [of financial users] This results in the above concept. It is often articulated as a preference for understatement rather than overstatement. If there are two possibilities having same chances of occurrence one results in the income and one results in expenses then in such a case estimate the expense and not the income. For decades this concept was informally stated as anticipate no profits but anticipate all losses. It leads to following conclusions- 1) Recognize revenues when they are reasonably certain and 2) Recognize expenses when they are reasonably possible. 8) The Realization concept: The conservatism concept suggested the period when revenue should be recognized and the realization concept suggest the amount of revenue to be recognized from a given sale. The term realization refers to inflows of cash or claims to cash (debtors) arising from sale of goods or services. This concept emphasizes that sale should be recognized as revenue only when it is reasonably certain of getting it. The term reasonably certain is relative in nature and each one may interpret it differently, but, in any case it should not be less than the selling price except in case of a discount which will be taken as loss. In case

of credit sale, debtors from whom the collection is uncertain should be treated as bad. 9) The Matching Concept: Both income and expenses have effect on the profit for a period. Income will increase the profit and expenses will decrease the profit. As any accountants objective is to find out profit for a particular period the income and its related expenses should be recognized in the same accounting period. 10) The Consistency Concept: This concept says that whatever method of accounting the firm has decided, it should follow the same consistently over a period of time. This helps in easy comparison of results for the two periods. It is not that the method once chosen can never be changed. One can change the method but not frequently and if changed should reflect the effect of such a change on profits. 11) The Materiality Concept: This concept says that the items which are trivial in nature and petty should not be recorded separately in the books of accounts. It means that items which are insignificant and have almost no effect on the results or on the decision of the users of the financial statement like shareholders, creditors etc. need not be reported separately. This principle thus concludes that all important information about the financial condition and activities of an entity must be disclosed which are going to affect the decision of the users.