Accoutning concepts, principles and conventions

Here are provided some details of following concepts, principles and conventions of accounting:
1. Entity Concept
2. Money Measurement Concept
3. Periodicity Concept
4. Accrual Concept
5. Matching Concept
6. Going on Concern Concept
7. Cost Concept
8. Principle of Prudence
9. Realization Concept
10. Dual aspect Concept
11. Consistency
12. Materiality
Hope, basic of these concepts is easy to understand.
Thanking you

1. ACCOUTNING CONCEPTS, PRINCIPLES AND CONVENTIONS

2. ACCOUNTING CONCEPTS Accounting concepts define the assumptions on the basis of which financial statements of a business entity are prepared. The word concept means an idea or notion, which has universal application. Financial transactions are interpreted in the light of the concepts, which govern accounting methods.

3. ACCOUNTING PRINCIPLES Accounting principles are a body of set beliefs commonly associated with the theory and procedures of accounting serving as an explanation of current practices and a guide for selection of conventions or procedures where alternatives exist.

4. ACCOUNTING CONVENTIONS Accounting conventions emerge out of accounting practices, commonly known as accounting principles, adopted by various organizations over a period of time. These are derived by usage and practice. They need not have universal application.

5. CONCEPTS, PRINCIPLES AND CONVENTIONS Entity Concept Money Measurement Concept Periodicity Concept Accrual Concept Matching Concept Going on Concern Concept Cost Concept Conservatism or prudence Realization Concept Dual Aspect Concept Consistency Materiality

6. 1. ENTITY CONCEPT According to this concept, business is treated as a unit separate and distinct from its owners, creditors, managers and others. Business transactions are recorded in the business books of accounts and owner’s transactions in his personal books of accounts. It’s applied to all organizations whether sole proprietorship partnership or corporate entities.

7. 2. MONEY MEASUREMENT CONCEPT This concept says that only those transactions and events are recorded in accounting which are capable of being expressed in terms of money. Some transactions or events can be important for business but can’t be measured in terms of money hence can’t be recorded.

8. 3. PERIODICITY CONCEPT This is called the concept of defining accounting period. As the business is intended to continue for a long period of time, thus the true result of a business’ operations can be ascertained only when the business is completely wound up. But, ascertainment of profit after very long period will be of little use to proprietorship and stakeholders because it will be too late to take corrective steps at that time. Thus, the entire life is divided into time-intervals which is generally 12-months.

9. 4. ACCRUAL CONCEPT Accrual basis is used for recording of transactions as it provides more appropriate information as compared to cash basis. Accrual concept applies equally to revenues and expenses. It does not matter if the cash has been received or not and paid or not. So, it shows true picture of financial position.

10. 5. MATCHING CONCEPT In this concept, all expenses matched with the revenue of that period should be taken into consideration. In Financial Statements, if any revenue is recognized then expenses related to earn that revenue should also be recognized. It is also based on accrual concept. Inflow or outflow of cash does not matter.

11. 6. GOING ON CONCERN CONCEPT As per this concept, it is assumed that the business will continue to exist for a long period of time in future. Transactions are recorded in books of business considering this concept. If this concept is not considered then payment made for assets would also have been shown in expenses which would result in a huge loss.

12. 7. COST CONCEPT According to this concept, an asset is recorded in books at price at which it was purchased, historical cost or the acquisition cost. Subsequent increase or decrease in market value is not recorded.

13. 8. REALIZATION CONCEPT This concept determines the time or the particular period in which the revenue is realized. Revenue is deemed to be realized when the title of ownership is transferred to purchaser and when he has legally become liable to pay the amount. It also does not relate to receipt of cash.

14. 9. DUAL ASPECT CONCEPT According to this concept, every business transaction is recorded as having a dual aspect. It means, every transaction affects atleast two accounts. If one is Debited, another must be Credited. This system of recording transactions is called ‘Double Entry System’.

15. 10. CONSERVATISM OR PRUDENCE According to this convention, all anticipated losses should be recorded in books of accounts, but all anticipated or unrealized gains should be ignored. Conservatism is a policy of playing safe. Example: Provision for Bad-Debts is made in anticipation of actual bad-debts.

16. 11. CONSISTENCY This concept states that accounting principles and methods should remain constant from one year to another. These should not be changed from your to year. If firm adopts different accounting principles in two accounting periods, then firms will not be able to compare the performance of current year to past years. But, it should not be understood that it does not allow a firm to change the accounting methods according to changed circumstances.

17. 12. MATERIALITY It is an exception to convention of full disclosure. It says, items having an insignificant effect or being irrelevant to users should not be disclosed. These such items can be merged with others.

18. THANK YOU