Upload
denyfo
View
241
Download
1
Embed Size (px)
Citation preview
8/9/2019 5573385 Accounting Principles
1/27
BASIC ACCOUNTINGCONCEPTS &CONVENTIONS
Presentation By
Prof. DEEPAK TANDON
IILM Gurgaon
8/9/2019 5573385 Accounting Principles
2/27
ACCOUNTINGPRINCIPLES
-related to the growth of the
business
Well being, solvency,earning
potential
Arisen fromexperiences,precedents,statements,
Govt agencies
8/9/2019 5573385 Accounting Principles
3/27
INPU
T
PROCES
S
OUTPU
T
Recording
Economic events Classifying Information to
Measured in Summarising User
sFinancial terms Interpreting
8/9/2019 5573385 Accounting Principles
4/27
PROCESS OF ACCOUNTING
In order to accomplish its main objective of communicating information
to the users accounting performs the following functions:
Recording It is concerned with the recording of financialtransactions in an orderly manner,soon after their occurrence in the
proper books of accounts.
Classifying It is concerned with the systematic analysis ofthe recorded data so as to accumulate the transactions of similar
type at one place.
Summarising It is concerned with the preparations andpresentation of classified data in a manner useful to the users.
This function involves of financial statements
Interpreting The accountant should explain not only what hashappened but also (a)why it happened ,and (b) what is likely to happen
under specified condition
8/9/2019 5573385 Accounting Principles
5/27
ACCOUNTING CYCLE
Step 1 : JOURNALISIN
G
Step 2: POSTIN
G
Step 3: BALANCIN
G
Step 4: TRIAL
BALANCE
Step 5: INCOME
STATEMENT
Step 6: BALANCESHEET
8/9/2019 5573385 Accounting Principles
6/27
CONCEPTS &CONVENTIONS
Concept=Accounting postulates:-
A.Entity concept
B.Dual Aspect Concept
C.Going Concern Concept
D.Accounting period Concept
E.Money measurement concept
F.Cost concept
8/9/2019 5573385 Accounting Principles
7/27
G.Periodic matching of the cost & revenueConcept
H. Variable Objective evidence Concept
CONVENTIONS:
--Disclosure/ Materiality/Consistency/conservatism
8/9/2019 5573385 Accounting Principles
8/27
BUSINESS ENTITYCONCEPT
For accounting purposes the Business
enterprise and the Owner are two separateentities
Can easily applied in case of limited liability
company because it is alegal entity
Togh to apply for partnership // Sole trader/ one
man business
Enabled the development of responsibility
accounting
8/9/2019 5573385 Accounting Principles
9/27
CONTD
Without these no business can be started or
run eg Building, plant & machinery, cash athand
CAPITAL Where these assets come from ?
When the proprietor invests money in thebusiness then the transaction gives rise to 2effects Assets of business increase and claimof proprietor on assets of business isrecognized. _____DUAL CONCEPT
CAPITAL=ASSETS
8/9/2019 5573385 Accounting Principles
10/27
THE MONETARY CONCEPT
All business transactions must be in the
currency of the country
Money is common unit of recordingtransactions relating to assets / Liabilities/
capital
Limitation Purchasing power ignores inflation
& doesnot take in account quality ofmanagement
8/9/2019 5573385 Accounting Principles
11/27
Contd --
Creditors in case the capital is contributed by
the proprietor is insufficient , business takes toborrowing from other parties.
Loan given by outside parties -------Increases
the cash (Asset),credit facilitygranted bysuppliers increases the goods-in trade of the
business
CAPITAL
+LIABILITIES=ASSETS===ACCOUNTING EQUATION
DOUBLE ENTRY
SYSTEM
8/9/2019 5573385 Accounting Principles
12/27
GOING CONCERNCONCEPT
-unless and until it has entered into a state of
liquidation, it will be viewed as to have anindefinite life.
A. accountant of the business does not make
unnecessary assumption regarding the forcedsale value of goods and assets
B.assets are depreciated on the basis ofexpected life rather than on the basis of marketvalue.
FUNDAMENTAL ACCOUNTING PRINCIPLE
ACCOUNTING PERIOD
8/9/2019 5573385 Accounting Principles
13/27
ACCOUNTING PERIODCONCEPT :
-Strictly speaking net income can be measured
by comparing assets of the business existing
at the time of its commencement with those
existing at the time of liquidation
-The Balance sheet & P/Laccounts should be
prepared at regular intervals which is one year
beginning on a specific date and ending 12
months later.
8/9/2019 5573385 Accounting Principles
14/27
MONEY MEASUREMENTCONCEPT
-accounting every worth of recording event,happening or transaction is recorded in termsof money.
-concept increases the understanding of the stateof affairs of the business
---Limitation ---subsequent changes in the money
value are conveniently ignored
8/9/2019 5573385 Accounting Principles
15/27
COST CONCEPT
-a. Asset is recorded at the price paid toacquire it ---I.e. At cost
B-This cost is the basis for all subsequentaccounting for the asset
When asset is recorded at cost price ,thechange in the real worth of the asset with the
passage of time is ordinarily recorded in the
accounts books.
8/9/2019 5573385 Accounting Principles
16/27
The fixed assts are recorded in the books of
accounts at a price paid for them
The cost is the amount or money spent inpurchasing the asset, amount spent in installing
and all expenses paid in making the assetready for use.
Record Fixed assets at historical costs asMarket value costly
PERIODIC MATCHING OF
8/9/2019 5573385 Accounting Principles
17/27
PERIODIC MATCHING OFCOST AND REVENUECONCEPT
A. revenue realisation-Determination of periodin which the revenue will be realised is the mainconcern---Cash basis//sales basis//production
basis
B. Matching Costs-In determining net income
from the business organisation al costs whichare applicable to the revenue of the periodshould be charged against that revenue.
8/9/2019 5573385 Accounting Principles
18/27
ACCOUNTINGCONVENTIONS
1.Convention of Disclosure
2.Convention of Materiality 3.convention of Consistency
4. Convention of Conservatism
8/9/2019 5573385 Accounting Principles
19/27
FULL DISCLOSURE
Full, adequate, Fair accounting information
Every financial statement should fully disclose
all relevant information that affects the average
investor
Honest reportings, summary of the accounting
policies followed by Financial statements is
appended.
8/9/2019 5573385 Accounting Principles
20/27
MATERIALITY
An item is to be considered as material
(significant} if the knowledge of that item
could affect the users of the financial
statements in taking some decisions
such as to invest or not to invest in the
enterprise or to give loan or not
8/9/2019 5573385 Accounting Principles
21/27
CONSISTENCY
Same accounting methods will be used for
similar items overtime.
I.Vertical Consistency within an inter-relatedgroup of financial statements bearing the same
date
Ii. Horizontal consistency found between
financial statements from period to period thusenabling comparison of performance of `oneentity with another.
CONSERVATISM
8/9/2019 5573385 Accounting Principles
22/27
CONSERVATISM(PRUDENCE)
Anticipate no gains but provide for all
losses and if in doubt write them off.
Thus accountant should record not only
actual losses but also those losses thatare likely to occur., Provision for bad
debts, premium on redemption of
debentures etc.
8/9/2019 5573385 Accounting Principles
23/27
Other forms of relationship
CAPITAL +LIABILITIES
=ASSETS NET WORTH =ASSETS-
LIABILITIES II.OWNERS EQUITY =TOTAL EQUITY
EQUITY OF THECREDITORS TOTAL EQUITY = TOTAL
ASSETS OWNER EQUITY =
TOTALEQUITY+REVENUE-EXPENSE EQUITY
OFTHE
CREDITORS
8/9/2019 5573385 Accounting Principles
24/27
Nature Of Accounts & RulesANY CAPITAL
ACCOUNT
RULES A/cs Dr Cr
Having RECORD RECORD
DECREASE INCREASESame
RuleANY LIABILITY
ACCOUNT
RECORD RECORD
DECREASE INCREASE
REVENUE Cr-
ACCOUNT-Dr RECORD
DECREASE INCREASE
8/9/2019 5573385 Accounting Principles
25/27
FOR ASSETS ACCOUNTS
-Dr means Increase
CrMeans Decrease
FOR EXPENSE ACCOUNT
Dr Means Increase
Cr-Means Decrease
8/9/2019 5573385 Accounting Principles
26/27
RULES
Dr Cr
PERSONAL -- The receiver The
Giver REAL -- What comes in What goes out
Nominal-- All Losses & All Gains &
Expenses Incomes
8/9/2019 5573385 Accounting Principles
27/27