accounting princples and convention

8/12/2019 Accounting Princples and Convention

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Accounting and Principles


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In order to make this language to convey the same meaning to allpeople, it is necessary that it should be based on certain uniformscientifically laid down standards. These standards are termedas accounting principles.

Accounting principles may be defined as those rules of action

or conduct which are adopted by the accountants universally whilerecording accounting transactions.

In the absence of common principles there will bea chaoticsituation and every accountant will have his ownprinciples. Not only the utility of accounts will be less but these willnot be comparable even in the same business. Therefore, it become

essential that common principles should be followedfor measuring business revenues and expenses.


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Essential features of Accounting

Principles Accounting principles are accepted if they satisfy the following

norms:

Usefulness:

A principle will be relevant only if it satisfies the needs of those whouse it. The accounting principles should be able to provide useful

information to its users otherwise it will not serve the purpose. Objectivity:

A principle will be said to be objective if it is based on facts andfigures. There should not be a scope for personal bias. If theprinciple can be influenced by the personal bias of users, it will not

be objective and its usefulness will be limited. Feasibility:

The accounting principle should be practicable. The principlesshould be easy to use otherwise their utility will be limited.


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Classification Of Accounting Principles

Accounting Concepts

The term concepts includes those basicassumptions or conditions upon which

accounting is based.

Accounting Conventions

The term "conventions" includes those customsor traditions which guide the accountants whilepreparing the accounting statements


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1. Definition of Accounting Concepts

Accounting conceptsmeans flow of thoughts of allwise accounting professionals of this world . It can also beinterpreted as "process of understanding of accounting tomake sense of universal acceptability. "In other words accounting concepts some normal ruleswhich can be changed but which has come in to existencewith so many hard work of accountants in past. These arebasics thoughts of an accountant.

The term concepts includes those basic assumptions orconditions upon which accounting is based. The followingare the important accounting concepts:


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Business Entity Concepts.

Going Concern Concept.

Money Measurement Concept. Dual Aspect Concept.

Accounting Period Concept.

Matching Concept. Realization Concept.


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Business Entity Concept:

In accounting, business is treated as separate entity fromits owners. Accounts are prepare to give information aboutthe business and not about those who own it. a distinctionis made between business transactions and personaltransactions.

Without such a distinction, the affairs of the business willbe mixed up with the private affairs of the proprietor andthe true picture of the firm will not be available.

The 'Business' and 'owner' are taken as two separate

entities. The accountant is interested to record transactionsrelating to business only. The private transactions of theowner will be recorded separately and will have no bearingon the business transactions.


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All the transactions of the business are

recorded in the books of the business from

the point of view of the business as an entity

and even the proprietor is treated as acreditor to the extent of his capital.


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Going Concern Concept:

According to going concern conceptit is assumed that the businesswill exist for a long time to come. Transactions are recorded in thebooks keeping in view the going concern aspect of the businessunit.

A firm is said to be going concern when there is neither the

intention nor necessary to wind up its affairs. In other words, itshould continue to operate at its present scale in the future.

On account of this concept the fixed assets are shown in thebalance sheet at a diminishing balance method i.e., going concernvalue. There is no need to show assets at market value becausethese have been purchased for use in future and earn revenues and

for sale purpose. If the business is not to continue then market value will have

significance. Since business is to continue, fixed assets will beshown at cost less depreciation basis.


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Money Measurement Concept:

Accounting to records only those transactions whichcan be expressed in terms of money. Transactions orevents which cannot be expressed in money do notfind place in the books of accounts though they may be

very useful for the business. For example, if a business has got a team of dedicated

and trusted employees, it is definitely an asset to thebusiness, but since their monetary measurement is notpossible, they are not shown in the books of business.

It should be remembered that money enables variousthings of diverse nature to be added up together anddealt with.


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Cost Concept:

This concept is closely related to the going concernconcept. According to this concept, an asset in ordinarilyrecorded in the books at the price at which it was acquiredi.e., at its cost price. This cost serves the basis for theaccounting of this asset during the subsequent period.

The 'cost' should not be confused with 'value'. It must beremembered that as the real worth of the assets changesfrom time to time, it does not mean that the value of suchan asset is wrongly recorded in the books.

The book values of the assets as recorded do not reflecttheir real value. They do not signify that values notedtherein are the values for which they can be sold.


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Dual Aspect Concept:

This is the basic concept of accounting. Modernaccounting system is based on dual aspectconcept. Dual concept may be stated as "forevery debit, there is a credit". Every transaction

should have two sided effect to the extent ofsame amount. For example, if A starts a businesswith a capital of $10,000. There are two aspectsof the transaction. On the one hand the business

has assets of $10,000 while on the other handthe business has to pay to the proprietor a sum of$10,000 which is taken as proprietor's capital.


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According to this concept, the life of the business is dividedinto appropriate segments for studying the results shownby the business after each segment. Since the life of thebusiness is considered to be indefinite (according to goingconcern concept) the measurement of income and studying

financial position of the business according to the aboveconcept, after a very long period would not be helpful intaking proper corrective steps at the appropriate time. It is,therefore, absolutely necessary that after each segment ortime interval the businessman must stop and see, how

things are going on. In accounting such a segment or timeinterval is called accounting period. It is usually of a year.


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At the end of each accounting period and incomestatement/profit & loss Account and a BalanceSheet are prepared. The income statement

discloses the profit or loss made by the businessduring the accounting period while Balance Sheetdiscloses the financial position of the business ason the last day of the accounting period. While

preparing these statements a proper distinctionhas to be made between capital and revenueexpenditure.


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Matching concept:

The aim of business is to earn profit. In order to ascertainthe profit the costs (expenses) are matched to revenue. Thedifference between income from sales and costs ofproducing the goods will be the profit. When business istaken as a going concern then it becomes necessary to

evaluate the performance periodically.A correct statement of income requires a distinctionbetween past, present and future expenditures. Therevenues and costs of same period are matched. In otherwords, income made by the business during a period can

be measured only when the revenue earned during aperiod is compared with the expenditure incurred forearning that revenue.


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Realization Concept:

This concept emphasizes that profit should beconsidered only when realized. The question is atwhat stage profit should be deemed to haveaccrued? Whether at the time of receiving the

order or at the time of execution of the order orat the time of receiving the cash? For answeringthis question the accounting is in conformity withthe law and Recognizes the principle of law i.e.,

the revenue is earned only when the goods aretransferred. It means that profit is deemed tohave accrued when property i goods passes tothe buyer, viz., when sales are made.


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The term "conventions" includes thosecustoms or traditions which guidethe accountants while preparing the

accounting statements. The following are theimportant accounting conventions.

Convention of Disclosure

Convention of Materiality Convention of Consistency

Convention of Conservatism


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Convention of Disclosure

The disclosure of all significant information is one ofthe important accounting conventions. It implies thataccounts should be prepared in such a way that allmaterial information is clearly disclosed to the reader.

The term disclosure does not imply that all informationthat any one could desire is to be included inaccounting statements. The term only implies thatthere is to a sufficient disclosure of information which

is of material in trust to proprietors, present andpotential creditors and investors.


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The idea behind this convention is that any

body who want to study the financial

statements should not be mislead. He should

be able to make a free judgment. Thedisclosures can be in the way of foot notes.

Within the body of financial statements, in the

minutes of meeting of directors etc.


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Convention of Materiality

It refers to the relative importance of an item or even.According to this convention only those events oritems should be recorded which have a significantbearing and insignificant things should be ignored. This

is because otherwise accounting will be unnecessarilyover burden with minute details. There is no formula inmaking a distinction between material and immaterialevents. It is a matter of judgment and it is left to theaccountant for taking a decision. It should be noted

that an item material for one concern may beimmaterial for another. Similarly, an item materialin one year may not be material in the next year.


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Convention of Consistency:

This convention means that accounting practicesshould remain uncharged from one period to another.For example, if stock is valued at cost or market pricewhichever is less; this principle should be followed year

after year. Similarly, if depreciation is charged on fixedassets according to diminishing balance method, itshould be done year after year. This is necessary for thepurpose of comparison. However, consistency does notmean inflexibility. It does not forbid introduction of

improved accounting techniques. If a change becomesnecessary, the change and its effect should be statedclearly.


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Convention of Conservatism:

This convention means a caution approach orpolicy of "play safe". This convention ensuresthat uncertainties and risks inherent in

business transactions should be given aproper consideration.

If there is a possibility of loss, it should betaken into account at the earliest. On theother hand, a prospect of profit should beignored up to the time it does not materialize


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On account of this reason, the accountants follow therule 'anticipate no profit but provide for all possiblelosses'. On account of this convention, the inventory isvalued 'at cost or market price whichever is less.' The

effect of the above is that in case market price hasgone down then provide for the 'anticipated loss' but ifthe market price has gone up then ignore the'anticipated profits.' Similarly a provision is made forpossible bad and doubtful debt out of current year's

profits. Critics point out that conservatism to an excess degree

will result in the creation of secrets reserves. This willbe quite contrary to the doctrine of disclosure.

accounting princples and convention

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