Chapter 3 ACCOUNTING PRINCIPLES PRESENTATION

The transactions have been distributed throughout the month to reflect a typical accounting cycle. The dates ensure a steady flow of business activities, including purchases, sales, expenses, and other transactions. These dates will help in preparing the journal, ledger, and trial balance systematically, ensuring a clear record of all financial activities for April 2024.







The transactions have been distributed throughout the month to reflect a typical accounting cycle. The dates ensure a steady flow of business activities, including purchases, sales, expenses, and other transactions. These dates will help in preparing the journal, ledger, and trial balance systematically, ensuring a clear record of all financial activities for April 2024.

1. THEORY BASE OF ACCOUNTING Accounting principles

2. Accounting Principles Accounting principles are guidelines to be followed in order to maintain uniformity and consistency in accounting . Certain rules or principles have been developed which are generally accepted by the accounting profession. These rules are called by different names such as principles, concepts, conventions, postulates, assumptions etc.

3. Necessity of accounting Principles 1.To have uniformity in Accounting principles, procedures and methods ,all over the country/world. 2.To have a standard set of rules 3.To get useful ,meaningful and logical accounting information for the users. Features of accounting principles 1.Accounting principles are man made 2.They are flexible 3.They are generally accepted accounting principles(GAAP ) 4.The general acceptance of accounting principles usually depends on its Relevance, feasibility and its ability to achieve the objectives of accounting.

4. Accounting Concepts/Assumtions/Principles The entire system of accounting is based on certain concepts,assumptions and Principles. They are :- 1. Business Entity Concept :- Business has a distinct and separate entity apart from its owners . We are writing the accounts of the business,but not of the business man. Eg :- Capital is treated as a liability under this concept. Transactions are recorded from the point of view of business , but not from the point of view of the owners. This concept is also known as Accounting Entity concept.

5. 2.money measurement principle Under this principle only those transactions and events that can be measured in terms ofmoney will be accounted in the books of accounts. Transactions & events that can not be measured in terms of money are not accounted. Eg :- Value of human resources is not accounted .

6. 3.accounting period principle The life of a business is broken down into smaller periods,(USUALLY ONE YEAR)for the purpose of preparing the financial statements. Financial statements are prepared in regular intervals to satisfy the users like owners,Govt etc . Business entities prepare Financial statements quarterly,half yearly and yearly. Eg for an accounting period: From April 1,2022 to 31 st March 2023 ( Financial year )

7. 4.Going concern assumption Under this it is assumed that the business would continue for a long period of time, and not going to close down in the near future. Eg :- * Fixed assets are depreciated under this assumption * Distinction between capital expenditure and Revenue expenditure is also made under this assumption. Accounting period principle is based on going concern assumption.

8. 5.FULL DISCLOSURE PRINCIPLE Under this principle, all information which are relevant and significant to be disclosed in the statement of accounts. All material and significant information related to the economic affairs of an entity should be reported ,ether in the finacial statements or as Note to accounts.

9. 6.materiality principle According to materiality principle ,transactions and events should be reported in the financial statements,if they are relavant material facts.An item is material if it can influence the decision of the user. Eg : (1)stationery is treated as an expense,but not as assets. (2) An amount spent on a minor repairs is not significant to be reported but if the amount of repairs is a major one which would increase the earning capacity ,it is a significant material fact.

10. 7.PRINCIPLE OF PRUDENCE or COSERVATISM PRINCIPLE Anticipate no gain but provide for all losses.This principle says to take into consideration all prospective losses,but not the prospective gains. Eg :- stock is valued at cost price OR market price whichever is lower. 2.Depreciation is provided on Assets 3. provision for bad and doubtful debts is created

11. 8.Historical cost principle according to cost concept an asset is recorded in the books at its cost (purchase price).The market value of an an asset may change in future,but the asset would continue to be shown at its historical cost. Eg : A machinery purchased for Rs.1,00,000/- would be shown as 100000 only(after depreciation) though the present value of this machinery in the market is Rs.150000/-

12. 9.matching principle According to matching principle,cost incurred to earn revenue should be recognised as expense in the same period where revenue is recognised.The revenue earned during a period is matched with the expenditure incurred to earn that rvenue . Eg : adjustments are made for outstanding expenses,and prepaid expenses. Thus under matching principle expenses for an accounting period should be matched with related revenues . The matching concept, thus, implies that all revenues earned during an accounting year, whether received during that year, or not and all costs incurred, whether paid during the year, or not should be taken into account while ascertaining profit or loss for that year.

13. 10. Dual aspect principle/duality principle For every transaction there are two aspects.One is the ' receiving of the benefit ' and the other is ' giving of the benefit . Receiving of the benefit is known as DEBIT aspect and giving of the benefit is known as CREDIT aspect. For every 'Debit' there is an equal and corresponding 'Credit' and vice - versa. This principle is known as Dual aspect principle.

14. 11. Revenue recognition(Realisation) concept According to revenue recognition concept , revenue is considered as realised ,when a transaction has been entered into and the obligation to receive the amount is established. Eg ;- Sold goods in February 2020(accounting year 2019-20),but cash payment would be in April 2020 (Accounting year 2020-21) only.Here the Revenue of sale should be recognised in the accounting year ending 31/3/2020 itself . There are some exceptions to this general rule of revenue recognition. In case of contracts like construction work, which take long time, say 2-3 years to complete, proportionate amount of revenue, based on the part of contract completed by the end of the period is treated as realised . Similarly , when goods are sold on hire purchase, the amount collected in installments is treated as realised

15. verifiable obective concept Verifiable objective means all business transactions should be evidenced and supported by documents.Accounting should be free from personal bias and there should be verifiable evidences for each and every transaction. Eg of evidences: Cash - Memo,Invoice,Vouchers,Bills etc.

16. 13.consistency assumption According to consistency principle,the methods and practices once selected and followed should be continued consistently . This would help --in the following manner:- ( a) Comparison would be easy (b) eliminates personal bias (c) helps in better understanding . Eg : (1)If we follow Written Down Value Method of providing depreciation ,it should not be changed to another method without valid reason. (2)Method of stock valuation FIFO or , LIFO etc should be consistent. However, consistency does not prohibit change in accounting policies. W e can /may CHANGE the accounting methods to cope with the law or Accounting standards.

17. 14.ACCRUAL CONCEPT According to this concept ,revenue is recognised when it is realised . Eg : expenses are recognised as expenses in the accounting period in which the related revenue is recognised.

18. Test Your Understanding - I Choose the Correct Answer 1. During the life-time of an entity accounting produce financial statements in accordance with which basic accounting concept : (a) Conservation (b) Matching (c) Accounting period (d) None of the above 2 . When information about two different enterprises have been prepared presented in a similar manner the information exhibits the characteristic of : (a) Verifiability (b) Relevance (c) Reliability (d) None of the above 3 . A concept that a business enterprise will not be sold or liquidated in the near future is known as : (a) Going concern (b) Economic entity (c) Monetary unit (d) None of the above 4 . The primary qualities that make accounting information useful for decision-making are : (a) Relevance and freedom from bias (b) Reliability and comparability (c) Comparability and consistency (d) None of the above Test Your Understanding - I 1. (c) 2. (d) 3. (a) 4. (b )

19. Test Your Understanding - II Fill in the correct word: 1. Recognition of expenses in the same period as associated revenues is called _______________concept. 2 . The accounting concept that refers to the tendency of accountants to resolve uncertainty and doubt in favour of understating assets and revenues and overstating liabilities and expenses is known as _______________. 3. Revenue is generally recongnised at the point of sale denotes the concept of _______________. 4. The _______________concept requires that the same accounting method should be used from one accounting period to the next. 5 . The_______________concept requires that accounting transaction should be free from the bias of accountants and others Answers: 1. Matching 2. Conservatism 3. Revenue Realisation 4. Consistency 5. Objectivity

20. Complete the following worksheet: ( i ) If a firm believes that some of its debtors may ‘default’, it should act on this by making sure that all possible losses are recorded in the books. This is an example of the ___________ concept. ( ii) The fact that a business is separate and distinguishable from its owner is best exemplified by the ___________ concept. 2020-2144 Accountancy ( iii) Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the ___________ concept . (iv) The ___________ concept states that if straight line method of depreciation is used in one year, then it should also be used in the next year . (v) A firm may hold stock which is heavily in demand. Consequently, the market value of this stock may be increased. Normal accounting procedure is to ignore this because of the ___________. ( vi) If a firm receives an order for goods, it would not be included in the sales figure owing to the ___________. (vii) The management of a firm is remarkably incompetent, but the firms accountants can not take this into account while preparing book of accounts because of ___________ concept.

21. Activity 1 Ruchica’s father is the sole proprietor of ‘Friends Gifts’, a firm engaged in the sale of gift items. In the process of preparing financial statements, the accountant of the firm Mr. Goyal fell ill and had to proceed on leave. Ruchica’s father was urgently in need of the statements as these had to be submitted to the bank, in pursuance of a loan of ` 5 lakh applied for the expansion of the business of the firm. Ruchica who is studying Accounting in her school, volunteered to complete the work. On scrutinising the accounts, the banker found that the value of building bought a few years back for ` 7 lakh has been shown in the books at ` 20 lakh, which is its present market value. Similarly, as compared to the last year, the method of valuation of stock was changed, resulting in value of goods to be about 15 per cent higher. Also, the whole amount of ` 70,000 spent on purchase of personal computer (expected life 5 years) during the year had been charged to the profits of the current year. The banker did not rely on the financial data provided by Ruchica . Advise Ruchica for the mistakes committed by her in the preparation of financial statements in the context of basic concepts in accounting.

22. Activity 2 A customer has filed a suit against a trader who has supplied poor quality goods to him. It is known that the court judgment will be in favour of the customer and the trader will be required to pay the damages. However, the amount of legal damages is not known with certainity . The accounting year has already been ended and the books are now finalised to ascertain true profit or loss. The accountant of the trader has advised him not to consider the expected loss on account of payment of legal damages because the amount is not certain and the final judgment of the court is not yet out. Do you think the accountant is right in his approach.