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Click to edit Master subtitle styleClick to edit Master subtitle styleAccounting PrinciplesAccounting Principles



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Accounting ConceptsAccounting Concepts

n Accounting concepts include the assumptions andAccounting concepts include the assumptions andconditions on which the science of accounting isconditions on which the science of accounting isbased.based.

n

These are also known as accounting standards.These are also known as accounting standards.n Important accounting concepts are:Important accounting concepts are:n Separate entity conceptSeparate entity conceptn Going concern conceptGoing concern conceptn Money measurement conceptMoney measurement conceptn Cost conceptCost conceptn Dual aspect conceptDual aspect conceptn Accounting period conceptAccounting period conceptn Realization conceptRealization concept



Money Measurement Concept Money Measurement Concept

n The concept of money measurement states that only thoseThe concept of money measurement states that only those

transactions and happenings in an organisation which can betransactions and happenings in an organisation which can be

expressed in terms of money such as sale of goods or paymentexpressed in terms of money such as sale of goods or payment

of expenses or receipt of income, etc. are to be recorded in theof expenses or receipt of income, etc. are to be recorded in thebook of accounts. All such transactions or happenings whichbook of accounts. All such transactions or happenings which

can not be expressed in monetary terms,can not be expressed in monetary terms,

n for example, the appointment of a manager, capabilities of itsfor example, the appointment of a manager, capabilities of its

human resources or creativity of its research departmenthuman resources or creativity of its research department

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Going Concern Concept Going Concern Concept

The concept of The concept of going concern assumes that agoing concern assumes that a

business firm would continue to carrybusiness firm would continue to carry out itsout its

operations indefinitely, i.e. for a fairly long periodoperations indefinitely, i.e. for a fairly long periodof time andof time and

would not be liquidated in the foreseeable future.would not be liquidated in the foreseeable future.

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Accounting Period Concept Accounting Period Concept

Accounting period refers to the span of time at the end of Accounting period refers to the span of time at the end of

which the financial statements of an enterprise are prepared,which the financial statements of an enterprise are prepared,

to know whether it has earned profits or incurred lossesto know whether it has earned profits or incurred losses

during that period and what exactly is the position of itsduring that period and what exactly is the position of its

assets and liabilities at the end of that period. Suchassets and liabilities at the end of that period. Such

information is required by different user at regular intervalinformation is required by different user at regular interval

for various purposes, as no firm can wait for long to know itfor various purposes, as no firm can wait for long to know it

financial results as various decisions are to be taken atfinancial results as various decisions are to be taken atregular intervals on the basis of such information.regular intervals on the basis of such information.

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Cost Concept Cost Concept

n The cost concept requires that all assets areThe cost concept requires that all assets are

recorded in the book of accounts at their recorded in the book of accounts at their

purchase price, which includes cost of purchase price, which includes cost of acquisition, transportation, installation andacquisition, transportation, installation and

making the asset ready to usemaking the asset ready to use

n

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Revenue RecognitionRevenue Recognition

(Realisation) Concept (Realisation) Concept n The concept of The concept of revenue recognition requiresrevenue recognition requires

that the revenue for a businessthat the revenue for a business transactiontransaction

should be included in the accounting recordsshould be included in the accounting recordsonly when it is realised.only when it is realised.

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Matching Concept Matching Concept

n The process of ascertaining the amount of profitThe process of ascertaining the amount of profit

earned or the loss incurred during a particular earned or the loss incurred during a particular

period involves deduction of related expenses fromperiod involves deduction of related expenses fromthe revenue earned during that period. Thethe revenue earned during that period. The

matching concept emphasizes exactly on thismatching concept emphasizes exactly on this

aspect.aspect.

n It states that expenses incurred in an accountingIt states that expenses incurred in an accounting

period should be matched with revenues duringperiod should be matched with revenues during

that period.that period.

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Full Disclosure Concept Full Disclosure Concept

n The financial statements makes a full, fair and adequateThe financial statements makes a full, fair and adequate

disclosure of all information which is relevant for takingdisclosure of all information which is relevant for taking

financial decisionsfinancial decisions

n The principle of full disclosure requires that all material andThe principle of full disclosure requires that all material and

relevant facts concerning financial performance of anrelevant facts concerning financial performance of an

enterprise must be fully and completely disclosed in theenterprise must be fully and completely disclosed in the

financial statements and their accompanying footnotes.financial statements and their accompanying footnotes.

n

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Consistency Concept Consistency Concept

n The accounting information provided by theThe accounting information provided by the

financial statements would be useful infinancial statements would be useful in

drawing conclusions regarding the workingdrawing conclusions regarding the workingof an enterprise only when it allowsof an enterprise only when it allows

comparisons over a period of time as well ascomparisons over a period of time as well as

with the working of other enterprises.with the working of other enterprises.

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Conservatism Concept Conservatism Concept

n The concept of conservatism (also calledThe concept of conservatism (also called

‘prudence’) provides guidance for recording‘prudence’) provides guidance for recording

transactions in the book of accounts and istransactions in the book of accounts and isbased on the policy of playing safebased on the policy of playing safe

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Objectivity Concept Objectivity Concept

n The concept of objectivity requires that accountingThe concept of objectivity requires that accounting

transaction should be recorded in an objective manner,transaction should be recorded in an objective manner,

free from the bias of accountants and othersfree from the bias of accountants and others

n This can be possible when each of the transaction isThis can be possible when each of the transaction is

supported by verifiably documents or vouchers. For supported by verifiably documents or vouchers. For

example, the transaction for the purchase of materialsexample, the transaction for the purchase of materials

may be supported by the cash receipt for the money paidmay be supported by the cash receipt for the money paid

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Accounting ConventionsAccounting Conventions

n Accounting conventions include the customsAccounting conventions include the customs

and traditions that assists the accountantsand traditions that assists the accountants

in preparing accounting statements.in preparing accounting statements.

n Important accounting conventions are:Important accounting conventions are:n Convention of conservatismConvention of conservatism

n Convention of full disclosureConvention of full disclosure

n Convention of consistencyConvention of consistency

n Convention of materialityConvention of materiality



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Institute of Chartered AccountantsInstitute of Chartered Accountants

of Indiaof India

n Council of Institute of Chartered Accountants issuesCouncil of Institute of Chartered Accountants issues

from time-to-time preface to the statements of from time-to-time preface to the statements of

accounting standards that defines the variousaccounting standards that defines the various

aspects of accounting standards.aspects of accounting standards.n It established an Accounting Standards BoardIt established an Accounting Standards Board

(ASB) on 22(ASB) on 22ndnd April, 1977.April, 1977.

n

The function of ASB is to formulate accountingThe function of ASB is to formulate accountingstandards, which are then established by thestandards, which are then established by the

Council of Institute of Chartered Accountants.Council of Institute of Chartered Accountants.



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Systems of Book-KeepingSystems of Book-Keeping

n Two types of systems of book-keeping are:Two types of systems of book-keeping are:n Single entry systemSingle entry system: It is used to record only: It is used to record only

cash and personal accounts.cash and personal accounts.

n Double entry systemDouble entry system: It is used to record each: It is used to record each

transaction under two different accounts. Ittransaction under two different accounts. It

is more reliable and efficient than theis more reliable and efficient than the

single entry system.single entry system.n



2020

Preface to the Statements of Preface to the Statements of

Accounting StandardsAccounting Standards

n It defines standards related to followingIt defines standards related to following

features:features:n Formation of accounting standards boardFormation of accounting standards board

n Objectives and functions of the AccountingObjectives and functions of the Accounting

Standards BoardStandards Board

n General purpose financial statementsGeneral purpose financial statements

n Scope of accounting standardsScope of accounting standards

n Procedure for issuing an accounting standardProcedure for issuing an accounting standard

n Compliance with the accounting standardsCompliance with the accounting standards



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Difference Between Double EntryDifference Between Double Entry

and Single Entry Systemsand Single Entry Systems



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Accounting EquationAccounting Equation

n It is defined as:It is defined as:

Assets = EquitiesAssets = Equities

Or, Assets = Liabilities + CapitalOr, Assets = Liabilities + Capital

n Assets refers to the properties owned by a businessAssets refers to the properties owned by a business

n Equities refers to the rights to the properties.Equities refers to the rights to the properties.

n Liabilities refers to the equity of creditors thatLiabilities refers to the equity of creditors that

represent debts of the business.represent debts of the business.n Capital refers to the equity of owners of theCapital refers to the equity of owners of the

business.business.



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Systems of AccountingSystems of Accounting

n Two basic systems of accounting are:Two basic systems of accounting are:

n Cash system of accountingCash system of accounting: In this system, entries are: In this system, entries are

made only when cash is received or paid. It is followedmade only when cash is received or paid. It is followed

by the Government of various countries.by the Government of various countries.

n Mercantile system of accountingMercantile system of accounting: In this system, entries: In this system, entries

are made for amount that is due for payment or receipt.are made for amount that is due for payment or receipt.

It is followed by the industrial and commercial firms.It is followed by the industrial and commercial firms.

n Mercantile system is preferred over cash systemMercantile system is preferred over cash system

because it considers the effect of transactions andbecause it considers the effect of transactions and

reflects the financial position of the company.reflects the financial position of the company.

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