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Accounting Concepts and


Unit 2
Accounting Principles
 Defined as those rules of action/
conduct, which are adopted by
accountants universally while recording
accounting transactions
 Classified into:
 Concepts: basic assumptions/ conditions on
which science of accounting is based
 Conventions: customs and traditions which
guide the accountant while preparing
accounting statements
 Accounting Policy: as adopted by
management, at its discretion
Accounting Concepts
 Business entity: business is separate, distinct
legal entity from its owner, properties not to
be mixed up, capital is hence a liability for
 Going concern: business concern will exist for
a fairly long time to come, into the foreseeable
future; thus assets recorded at cost and not
MP, provision for their replacements
 Money measurement: transactions involving
money/ money’s worth will be recorded in
books of the business; money is the common
denominator for easy understanding/
 Periodicity Concept: time interval
considered for preparation of accounts:
accounting year, accounts sometimes
prepared half-yearly, quarterly as well
 Accrual Concept: all incomes and
expenses accrued in a year are
considered for preparation of financial
statements, whether or not actually
paid/ received in that year
Basic Principles
 Principle of Income Recognition:
revenue is recognized when sale is
made i.e. when property in goods is
transferred to buyer and he becomes
liable to pay
 Principle of expense: expense is
different from payments: revenue
expense is charged against profits and
capital expense is shown as assets in
 Principle of Matching Cost and Revenue:
matching of revenues and expenses of
a period, adjust outstanding and
 Principle of Historical Costs: all assets are
recorded at their cost of acquisition, which
forms basis for their subsequent accounting as
 Principle of Full Disclosure: of all material and
relevant information; also required as per the
Companies Act, 1956
 Double Aspect Principle: business gives and
receives benefits, both should match, thus
assets = liabilities; for every debit, there is an
equivalent credit; leads to double entry system
of book keeping
 Modifying Principle: cost of applying a principle
should not be more than benefit derived from
 Principle of Materiality: not to overburden
statements with non material/ minute/
insignificant details
 Principle of Consistency: accounting practice
once adopted should not be changed in next
year(s), for easy comparison
 Principle of Conservatism/ Prudence: anticipate
no profits but provide for all anticipated losses;
make provisions for all expected risks
Accounting Standards
 GAAP: Generally Accepted
Accounting Principles
 Accounting Standards Board (ASB):
 Systems of accounting:
 Cash/ receipt basis
 Mercantile/ accrual basis
 Hybrid system