Accounting concepts and principles Commerce

Accounting concepts and principles

1. Accounting concept & accounting principles

2. Accounting concepts Actually There Are A Number Of Accounting Concepts And Principles Based On Which We Prepare Our Accounts. These Generally Accepted Accounting Principles Lay Down Accepted Assumptions And Guidelines And Are Commonly Referred To As Accounting Concepts.

3. 3 Accounting Concepts Business Entity Money Measurement Cost Concept Consistency Conservatism Going Concern Realization

4. 4 Accruals Dual aspect Disclosure Materiality Revenue recognition Matching principle Accounting standards

5. Business entity concept The Business And Its Owner(s) Are Two Separate Existence Entity. Any Private And Personal Incomes And Expenses Of The Owner(s) Should Not Be Treated As The Incomes And Expenses Of The Business. E.G.: If Mr. Who Is A Proprietor Of Business And Using His Business Vehicle Partly For Personal Use And Partly For Business, Part Of The Vehicle Expenses Are Treated As Drawings.

6. All Transactions Of The Business Are Recorded In Terms Of Money It Provides A Common Unit Of Measurement E.G.: If The Business Owns 2 Computers, 2 Buildings, 5 Tables, 5 Chairs, 1 Motor Car, Then It Is Difficult To Understand The Value Business. If It Is Expressed In Monetary Terms Such As. 2 Computers= Rs 75000 + 2 Buildings 10, 00,000 + 5 Table- Rs 15,000 + 5 Chairs = Rs 5,000 + 1 Motor Car = 3, 80,000 = Total Rs 14, 75,000. Money Measurement Concept

7. Cost Concept Assets Should Be Shown On The Balance Sheet At The Cost Of Purchase Instead Of Current Value. Suppose A Firm Purchases A Building For Rs 50, 00,000 But The Value Of That Building Is Rs 60, 00,000. In The Books Of Account Building Will Be Recorded Rs 50, 00,000 Only And Not Rs 60, 00,000.

8. Consistency Companies Should Choose The Most Suitable Accounting Methods And Treatments, And Consistently Apply Them In Every Period. Changes Are Permitted Only When The New Method Is Considered Better And Can Reflect The True And Fair View Of The Financial Position Of The Company. The Change And Its Effect On Profits Should Be Disclosed In The Financial Statements.

9. Conservatism Revenues And Profits Are Not Anticipated. Only Realized Profits With Reasonable Certainty Are Recognized In The Profit And Loss Account. However, Provision Is Made For All Known Expenses And Losses Whether The Amount Is Known For Certain Or Just An Estimation. This Treatment Minimizes The Reported Profits And The Valuation Of Assets.

10. Going Concern Concept The Business Will Continue In Operational Existence For The Foreseeable Future. Financial Statements Should Be Prepared On A Going Concern Basis Unless Management Either Intends To Liquidate The Enterprise Or To Cease Trading.

11. Realization Concept Revenues Should Be Recognized When The Major Economic Activities Have Been Completed. Sales Are Recognized When The Goods Are Sold And Delivered To Customers Or Services Are Rendered. E.g.: An Office Was Purchased A Few Years Ago For Rs 5 Lakhs, Its Current Market Value May Be Rs 70 Lakhs. However, It Will Not Be Recorded In The Books, At 70 Lakhs, Unless It Is Actually Sold And The Higher Value Is Realized In Cash.

12. Accrual concept All Expenses And Incomes Are To Be Shown In The Books In The Period In Which They Are Incurred, Whether Actually Paid In Cash Or Not. E.G.: If The Financial Year Ends On 31 St March And The Rent Of March Will Be Paid In April, Which Is The Next Financial Year. This Rent Will Be Treated As An Expense Of The Current Year, Even Though It Has To Yet Been Paid. This Concept Helps To Calculate The Correct Amount Of Profit Of Loss Of A Particular Period.

13. Dual Aspect concept This Concept Recognizes That Every Business Transaction Has Two Main Aspects. The Aspects Of Debit And The Accepts Of Credit. E.G.: If There Is Purchases Of Goods, It Involves Two Aspects- One, The Receipt Of Goods And, Second, The Payment Of Cash. The Total Amount Debited Always Equals The Total Amount Credited. Assets = Liabilities + Capital Or Capital = Assets- Liabilities As A Matter Of Fact The Entire System Of Double Entry Book – Keeping Is Based On This Concept.

14. Disclosure Financial Statements Should Be Prepared To Reflect A True And Fair View Of The Financial Position And Performance Of The Enterprise. All Material And Relevant Information Must Be Disclosed In The Financial Statements.

15. Materiality Immaterial Amounts May Be Aggregated With The Amounts Of A Similar Nature Or Function And Need Not Be Presented Separately. Materiality Depends On The Size And Nature Of The Item.

16. Revenue Recognition Principle The Realization Concept Develops Rules For The Recognition Of Revenue. The Concept Provides That Revenues Are Recognized When It Is Earned, And Not When Money Is Received. A Receipt In Advance For The Supply Of Goods Should Be Treated As Prepaid Income Under Current Liabilities. Since Revenue Is A Principal Component In The Measurement Of Profit, The Timing Of Its Recognition Has A Direct Effect On The Profit.

17. Matching Principle Expenses Incurred In An Accounting Period Should Be Matched With The Revenue Recognized In That Period. E.G. If Revenue And Unaccrued Revenues. Matching Does Not Mean That Expenses Must Be Identifiable With Revenues. Expenses Charges Of A Period May Or May Not Be Related To The Revenue Recognized In That Period. The Appropriate Costs Have To Be Matched Against The Appropriate Revenues For That Accounting Period.

18. Accounting standards Standards Of Accounting Is Recommended By The Institute Of Chartered Accountants Of India Are Prescribed By The Central Government In Consultation With The Advisory Committee Of Accounting Standards. Accounting Standards Are Written Policy Documents Issued But The Expert Accounting Body Or By Government To Other Regulatory Body Covering Following Various Aspects. The Council Of The Institute Of Chartered Accountants Of India Has So Far Issued Twenty Eight Accounting Standards.

19. List of Accounting standards… AS 1 : Disclosure of Accounting Principles. AS 2 : Valuation of Inventories. AS 3 : Cash Flow Statements. AS 4 : Contingencies and Events Occurring After the Balance Sheet Date. AS 5 : Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. AS 6 : Depreciation Accounting . AS 7 (revised) : Construction Contracts. AS 8 : Accounting for Research and Development. (withdrawn) AS 9 : Revenue Recognition . AS 10 : Accounting for Fixed Assets. AS 11 (Rev. 2003) : The Effects Of Changes In Foreign Exchange Rates. AS 12 : Accounting for Government Grants. AS 13 : Accounting for Investments. AS 14 : Accounting for Amalgamations. AS 15 (Rev. 2005) : Employee Benefits. AS 16 : Borrowing Costs. AS 17 : Segment Reporting . AS 18 : Related Party Disclosures. AS 19 : Leases. AS 20 : Earnings Per Share.

20. AS 21 : Consolidated Financial Statements. As 22 : Accounting For Taxes On Income. As 23 : Accounting For Investments In Associates In Consolidated Financial Statements. As 24 : Discontinuing Operations. As 25 : Interim Financial Reporting. As 26 : Intangible Assets. As 27 : Financial Reporting Of Interests In Joint Ventures. As 28 : Impairment Of Assets. As 29 : Provisions, Contingent Liabilities And Contingent Assets. As 30 : Financial Instruments: Recognition And Measurement. As 31 : Financial Instruments: Presentation . As 32 : Financial Instruments: Disclosures. List of Accounting standards… List of Accounting standards cont…