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A Presentation On,

Every Science consists of principles. Since accounting is a science, it also consists of Principles. According to the Canadian Institute Of Chartered Accountants,
Accounting Principles are the body of doctrines commonly associated with the theory and procedure of accounting. They serve as an explanation of current practices and as a guide for the selection of conventions or procedures where alternatives exist.

Accounting Principles when accepted by accountants all over the worls, are known as Generally Accepted Accounting Principles. In this way, GAAP are the set of rules and guidelines used in accounting. Accounting Principles become GAAP when they satisfy following three criteria :Usefullness : The accounting principle should increase the usefulness of accounting records by making accounting information more meaningful. Objectivity : An accounting prnciple should be reliable and trustworthy in the sense that accounting information should be supported by facts and should not be influenced by personal bias. Feasibility : An accounting principle should be practical in sense that it can be implemented without any difficulty.

The term accounting concept includes those basic assumptions or conditions upon which the science of accounting is based.

Accounting

Period

Going

Concept Dual Aspect Concept Separate Entity Concept Money Masurement Concept Realization Concept Cost Concept

Concern Concept Accounting Equivalence Concept Consistency Concept Matching of Cost & Revenue Concept Accrual Concept Consercatism

Also

called as the concept of definite accounting period. According to this concept, accounts should be prepared after every period and not at the end of the entity. Usually, this period is one calender year. In india, one period starts from 1st April of a year to 31st March of the immediately following year. This period is called a Financial Year

At

the end of each period, Final accounts of the firm is made (Balance Sheet and Income Statement) Facilitates comparing of financial statements of different periods. Helps in uniform and consistent accounting treatement for acertaining the profit and assets of the business. Matching of periodic revenues with expenses for getting correct result of the business operation is possible.

This

is the core of doble entry book-keeping. According to this concept, all business transactions involve 2 fold aspects and both the aspects have to be recorded in the books of account.

Liabilities + Capital = Assets This is called as the Accounting Equation

Dual Aspect Concept Contd...

Thus we can say that, Increase in one asset decreases other asset. Increase in one asset situltaneously increases liability. Decrease in one asset increae another asset. Decrease in one asset decreases the liability Vice Versa

According

to this concept, business is considered to be seprate entiy from the propritor(s). This concpt is extremly helpful in keeping business affairs stricly free from the affects of private affairs of the proprietor. Sole Proprietor and partners are not considered as seperate entities in the eyes of law, yet for accounting purpose, they will be considered as seperate entities.

On

the basis of this concept, proprietor is treated as a creditor for the businessWhen

he contributes capital, he is treated as a person who has invested his amount in the business and therefore capital appears in the liability side of a balnce sheet of the proprietors business.

This

Concepts states that, only those transactions which are expressed in terms of money are recorded in the books of accounts. In Accounts, money serves as a standard of economic value. Transactions even if they affect the results of the business materially are not recorded if they are not converted in monetary terms. Measuring units for money is taken as the currency of the ruling country i.e. the ruling currency of a country provides a common denomination for the value of material objects.

Money measurement Concept Contd...

Effects of this concept: In the absence of this concept, it would have not been possible to add various possession

For eg: a proprietor has 400 chairs, 10 machines and 500 acres of land, he cannot add them, but finding out their values in money, total amounts of all these possessions can easily be found out.

Many

material transactions and events are not recorded in the books of accounts just because it cannot be measured in monetary terms

Thus it is recognized by all the accountants that this concept has its own limitations and inadequacies yet it is used for accounting purposes because it is not possible to adopt a better measurement scale.

This concept is closely related to the going concern concept. According to this concept

An asset is ordinarily entered in the accounting records at a price paid to acquire it and This concept is the basic of all subsequent accounting for the assets.

This concept does not mean that the asset will always be shown at cost

Asset is recorded at cost at the time of its purchase but it may systematically be reduced in its value by charging depreciation.

This concept has the advantage of bringing objectivity in the preparation and presentation of financial statement.

This

concept is mainly for fixed assets, current assets are not effected by it. Current assets appear in the balance sheet at cost or market price, whichever is low though they two are acquired at cost price. Eg, if a business buys a plot of land for Rs. 50,000 the asset would be recorded in the books at 50,000 even if the market value at that happens to be 60,000. In case a year later the market value of this asset comes down to Rs. 40,000 it will ordinarily continue to be shown at Rs. 50,000 and not Rs. 40,000

According

to this concept, Revenue is recognized when a sale is made. Sale is considered to be made at the point when the goods passes to the buyer and he becomes legally liable to pay for it. Any changes in the value of an asset is to be recorded only when the business realizes it.

When asset is recorded at its historical cost of Rs.5 Lakhs and even if its current cost is Rs. 15 Lakhs, such changes is not counted unless there is certainty that such changes will materialize.

Realization Concept Contd...


Effect

of this concept:

Accountants

follow a more conservative path. They try to cover all probable losses but do not count any probable gain.

Exception
In

to the Concept

case of hire-purchase ownership of the goods passes to the buyer only when the last installment is paid. But sales are presumed to have been made to the extent of the installment received and installment outstanding.

This

concepts relates with the indefinite long economical life of the business. The assumption is that the business will continue to exist for unlimited period unless of course it is dissolved due to some reason or the other. This is why in the Balance Sheet market price of fixed assets is not considered.

If

the condition of business is depreciated, to such an extent that it is to be closed down, even then the accountants concept is that business is to continue and he records all big and small transactions. He never stop making records on the possibilities of closing down of business Effects of this concept

Working life of assets is taken into consideration for writing off depreciation because of this concept. Whatever bad position of the business may be, it does not effect the accounting aspect of the business.

Every

Businessman is eager to make maximum profit at minimum cost. Hence in an accounting period he tries to find out revenue and cost of this year and compares it it that of the another year. Efforts made to make revenue are termed as cost and the positive results of these effects are termed as revenue. The object of this is that accounting record to be made in such a manner that cost may be compared with revenue. In case the accounting method does not facilitate this comparison then accounting method is regarded as unsatisfactory.

Effects

of this concept:

Its

because of this concept an accountant records all expenses of a year (weather are paid in cash or are outstanding) all revenues (whether are received in cash or are earned but not received in cash) Proprietor can easily know about his profit or loss with the application of this concept. He can create efforts for creating economies, increasing efficiency and in increasing income on the basis of the application of this concept.

In

order to achieve comparability of the financial statement of an enterprise through time, the accounting policy are followed consistently from one period to another. A change in an accounting policy is made only in certain exceptional circumstances. The concept of consistency is applied particularly when alternative methods of accounting are equally acceptable.

An

enterprise should change its accounting policy in any of the following circumstances only:
To bring the books of accounts in accordance with the issued accounting standards. To compliance with the provision of law When underchanged circumstances it is felt that new method will reflect more true and fair picture in the financial statement.

 

But

the concept of consistency does not imply non-flexibility as not to allow the introduction of improved method of accounting

The Proprietor provides the fund for acquisition of assets. Hence the asset owned by the business must be equal to the funds provided by the proprietor which is technically called Equity. Whatever properties or things are owned by the proprietor, they are termed as asset of the proprietor. Hence accounting equivalence equation is

Asset = Equity

In addition to own funds, money is borrowed which is kown as liability. Hence, assets are acquired through equity and liability.

Therefore accounting equation is

Asset = Owners Equity + Liabilities

Any

business transaction can be recorded on the basis of this concept. Really speaking, the principle of double entry system that every debit has a corresponding credit is based on this concept. Each Transaction is recorded in such a way that the accounting equation continues. Thus two aspects of transaction are recorded in such a way that their effects balance each other and equation is maintained. Had this equivalence concept not been there, double entry system of book keeping would have never come into existence.

This Concept states that accountant should not anticipate income and should provide for all possible losses. When there are many alternative values of an asset, an accountant should choose the method which leads to the lesser value. Rules of Current asset valuation Cost or market price whichever is lower originated from this concept. The realization concept also states that no change should be counted unless it has materialized. The conservatism concept puts a further break on it. It is not prudent to count unrealized gain but it is desirable to guard against all possible losses.

For

this concept there should be atleast three qualitative characteristics of financial statements, namely,

Prudence i.e. judgment about the possible future losses which are to be guarded, as well as gains which are uncertain. Neutrality i.e. unbiased outlook is required to identify and record such possible losses as well as to exclude uncertain gains. Faithful Representation of alternative values

Many

accounting author, however are of the view that conservatism leads to understatement of wealth and income and it should not be the basis for the preparation of financial statements.

This

concept means recognition of revenue and cost as they are earned or incurred and not as money is received or paid. This concept relates to measurement of income, identifying assets and liabilities. The effects of transactions and other events are recognized on mercantile basis i.e. when they occur and not as cash or a cash equivalent is received or paid. They are recorded in the books and reported in the financial statement to which they relate.

An Eg, Mr X Event Purchased Clothes to resell Transaction 30000 in Cash 20000 in Credit 50000 Total 40000 in Cash 20000 in Credit 60000 in Total Note Here the expenses i.e. the cost incurred for revenue is 50000 and not 30000 of cash paid It is to be noted that the revenue here have to be recorded as 60000 in the books irrespective of the fact that he received only 40000 as on date.

Sold To Mr Y

Profit and Loss A/C

Revenue = 60000 The actual revenue and (-)Expenses = 50000 expenses reflects in the (=)Profit = 10000 financial statement.

Financial Statements prepared on the accrual basis inform users not only of past events involving the payment and receipt of cash but also of obligation to pay cash in the future and of resources that represents cash to be received in the future.