Basic Concepts Session 2

8/4/2019 Basic Concepts Session 2

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Basic Concepts


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Accounting Principles-

Comprise a set of rules , concepts and guidelines

used in preparation of financial accounting reports.

Two Types:

Acc. Concepts

Acc. Conventions


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Acc. Concepts-

It is building block on which the entire acc. Structure rests . Theyare general ideas or notions . It is used to denote acc.Assumptions which are widely accepted and fundamental tothe science of accounting .

Following are Imp. Acc. Concepts

1) Business Entity Con.

It is assumed that business has separate existence andits entity is different from that of its owners . Every

transaction is analyzed from the point of view of a businessenterprise and not that of person associated with it .Personal assets of the owners or shareholders are notconsidered in the books of accounts of the business.


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2) Money measurement concept

Only the monetary transactions which are

capable of being expressed in terms of money are

included in accounting records , and those which arenot related are not recorded though they may be

vital to the org . Ex.-Loyalty of employees, entrance

of a competitor, quality of product etc. cannot be

recorded . It ignores changes in the purchasing

power of money and presumes that money remains

constant. i.e. no effect of inflation.


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3) Dual Aspect concept-

Every business transaction has two fold effectsince the system of recording is based on double

entry sys. Of book keeping . So For every Debit ,there is a Credit .

Assets = Owners Equity + External Liabilities.

For ex. introduction of funds by owner also creates

corresponding obligation for their repayment whichis recorded as capital.


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4) Going Concern concept-

It means that business activities will continue

for a fairly long period of time , presuming the life

of the business to be perpetual and no intention toliquidate the business in foreseeable future . Thus

continuity of activity implies that assets are

acquired for utilization and not for resale.


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5) Accounting period concept-

It refers to span of time at the end of which financial

statements are prepared . Though life of business is

considered indefinite , to provide timely information,keeping in view its usefulness to users, indefinite life

of business is split into shorter intervals of time

which are called accounting periods.


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6) Cost Concept

This concept lies an idea that:

- the resources of the business are recorded in the booksat the actual price paid to acquire them i.e.. the cost

price, but it gets reduced in its value by the amount ofdepreciation charged.

- this cost becomes the basis of accounting of the assetduring the subsequent periods.

The valuation does not reflect the current worth of theassets represented by market prices, which normallychange with the passage of time


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7) Accrual Concept

it requires that revenue is recognized when

realized and expenses are recognized when they

become due and payable without regard to actualtime of receipt or payment of cash.This concept

requires adjustments of Prepaid and O/s exp. And

accrued and unearned revenue.


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8) Matching Concept

This concept is based on Acc. Period concept which

requires that there should be a periodic matching of

costs incurred and revenues earned during thatperiod.To compare profit or loss of a period it is

necessary to match exp. with revenue of that period


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9) Realization Concept-

This indicates that the amount of revenue to be

recognized is the amount that is reasonably certain

to be realised.


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1) Conservatism

The Working rule is-

Anticipate no profits ,but provide for all possible

losses.It means,

- Do not consider gain untill it is realised

- Create provision for contingencies against current

years income for likely loss in value of assets andincurrence of liabilities.

For ex. Prov. For bad debts , disc. On debtors etc.


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2) Consistency-

It emphasizes the use of uniform accounting

practices consistently for similar items from year to

year, so that the results disclosed in the financialstatements will be comparable . For Ex. Method of

charging depreciation, valuation of inventory.

However it does not preclude desirable changes in

accounting procedures for better and meaningfulpresentation to decision makers, provided it should

be fully and separately disclosed.


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3)Materiality-

It requires that only the material significant details areto be disclosed and insignificant details are to be ignored.An item will be considered as material, if the knowledge

of that item influence the users of financial statements intaking decisions . Materiality depends not only onamount of an item but also on nature of info. , size ofbusiness , level of person requiring info. etc. For ex.Rounding off to nearest rupee , purchase of stationery

treated as consumables though they are in the nature ofassets , petty exp. clubbed together etc.


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4) Disclosure

This ensure full , fair and adequate disclosure ofbusiness transactions in financial reports which areprepared in conformity of generally accepted accounting

principles.Full nothing is omitted

Fair Acc. Principles are applied to report true and

fair view

Adequate anything which influences the decisionof user must be disclosed

The whole idea is to provide value added information to theuser to take informed decisions.


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Golden Rules of Accounting

Duality concept provides that every transaction hastwo sides the debit and the credit. Rules are

Nominal Account Debit all exp. and losses

Credit all incomes and gainsReal Account Debit what comes in

Credit what goes out

Personal Account Debit the Receiver

Credit the Giver

Documents

Basic Concepts Session 2