UNIT – I Accounting Concepts DEPARTMENT OF MANAGEMENT STUDIES UNIT – I Accounting Concepts 6/7/2018 Dr. G. MAHESWARAN/AP 1/46

Accounting Concepts Dr. G. MAHESWARAN/AP 6/7/2018 2/46

The term ‘concept’ is used to connote accounting postulates, that is necessary assumptions and conditions upon which accounting is based. These are the theories on how and why certain categories of transactions should be treated in a particular manner. Dr. G. MAHESWARAN/AP 3/46 6/7/2018

Business Entity Concept Dr. G. MAHESWARAN/AP 4/46 6/7/2018

The business and its owner(s) are two separate entities Dr. G. MAHESWARAN/AP 5/46 6/7/2018

The Books Of Accounts are prepared from the point of view of the business Hence… 6/46 6/7/2018 Dr. G. MAHESWARAN/AP

Capital (Liability) Drawings (Asset) 7/46 Dr. G. MAHESWARAN/AP 6/7/2018

The Personal Transactions of the Owner are not recorded. For Example: A Car purchased by the owner for personal use is not Recorded in the Books Of Account Of the Business. Dr. G. MAHESWARAN/AP 8/46 6/7/2018

Going Concern Concept Dr. G. MAHESWARAN/AP 9/46 6/7/2018

It is assumed that the entity is a going concern, i. e It is assumed that the entity is a going concern, i.e., it will continue to operate for an indefinitely long period in future and transactions are recorded from this point of view. Dr. G. MAHESWARAN/AP 10/46 6/7/2018

Money Measurement Concept Dr. G. MAHESWARAN/AP 11/46 6/7/2018

In accounting, a record is made only of those transactions or events which can be measured and expressed in terms of money. Dr. G. MAHESWARAN/AP 12/46 6/7/2018

Non monetary transactions are not recorded in accounting. Innovativeness Attitude Experience Team work skill Honesty Passion Dr. G. MAHESWARAN/AP 13/46 6/7/2018

Accounting Period Concept Dr. G. MAHESWARAN/AP 14/46 6/7/2018

For measuring the financial results of a business periodically, the working life of an undertaking is split into convenient short periods called accounting period. Dr. G. MAHESWARAN/AP 15/46 6/7/2018

Dr. G. MAHESWARAN/AP 16/46 6/7/2018

Cost Concept Dr. G. MAHESWARAN/AP 17/46 6/7/2018

An asset acquired by a concern is recorded in the books of accounts at historical cost (i.e., at the price actually paid for acquiring the asset). The market price of the asset is ignored. Dr. G. MAHESWARAN/AP 18/46 6/7/2018

Historical Cost Of Market Value Of Dr. G. MAHESWARAN/AP 19/46 6/7/2018

Dual - Aspect Concept Dr. G. MAHESWARAN/AP 20/46 6/7/2018

For Every Debit, there is a Credit Every transaction should have a two- sided effect to the extent of same amount Dr. G. MAHESWARAN/AP 21/46 6/7/2018

Cash Account Rs. 10,000 Sales Account Rs. 10,000 For Example: Cash Sales Rs. 10,000 Debit Cash Account Rs. 10,000 Credit Sales Account Rs. 10,000 Dr. G. MAHESWARAN/AP 22/46 6/7/2018

Purchases Account Rs. 20,000 Ram’s Account Rs. 18,000 For Example: Purchased From Ram goods worth Rs. 20,000 and discount received Rs. 2,000. Debit Purchases Account Rs. 20,000 Credit Ram’s Account Rs. 18,000 Discount Recd. Account 2,000 Dr. G. MAHESWARAN/AP 23/46 6/7/2018

This Concept has resulted in THE ACCOUNTING EQUATION Dr. G. MAHESWARAN/AP 24/46 6/7/2018

Dr. G. MAHESWARAN/AP 25/46 6/7/2018

Realisation Concept Dr. G. MAHESWARAN/AP 26/46 6/7/2018

Profit is earned when goods or services are provided /transferred to customers. Thus it is incorrect to record profit when order is received, or when the customer pays for the goods. Dr. G. MAHESWARAN/AP 27/46 6/7/2018

Matching Concept Dr. G. MAHESWARAN/AP 28/46 6/7/2018

The matching principle ensures that revenues and all their associated expenses are recorded in the same accounting period. The matching principle is the basis on which the accrual accounting method of book- keeping is built. Dr. G. MAHESWARAN/AP 29/46 6/7/2018

Salary paid in 2012-13 relating to 2011-12 For Example Salary paid in 2012-13 relating to 2011-12 Such salary is treated as Expenditure for 2011-12 under Outstanding Salaries Account, not for the year 2012-13 Dr. G. MAHESWARAN/AP 30/46 6/7/2018

Accounting Conventions Dr. G. MAHESWARAN/AP 31/46 6/7/2018

Accounting Conventions are the common practices which are universally followed in recording and presenting accounting information of business. It helps in comparing accounting data of different business or of same units for different periods. Dr. G. MAHESWARAN/AP 32/46 6/7/2018

Materiality Dr. G. MAHESWARAN/AP 33/46 6/7/2018

Only those transactions, important facts and items are shown which are useful and material for the business. The firm need not record immaterial and insignificant items. Dr. G. MAHESWARAN/AP 34/46 6/7/2018

Company XYZ Ltd. bought 6 months supplies of stationary worth $600. Illustration: Company XYZ Ltd. bought 6 months supplies of stationary worth $600. Question: Should the Company spread the cost of this stationary for 6 months by expensing off $100 per month to the income statement? Answer: Based on this concept, as the amount is so small or immaterial, it can be expensed off in the next month instead of tediously expensing it in the next 6 months. 35/46 6/7/2018 Dr. G. MAHESWARAN/AP

Full Disclosure Dr. G. MAHESWARAN/AP 36/46 6/7/2018

Financial Statements and their notes should present all information that is relevant and material to the user’s understanding of the statements. Dr. G. MAHESWARAN/AP 37/46 6/7/2018

Dr. G. MAHESWARAN/AP 38/46 6/7/2018

Conservatism Dr. G. MAHESWARAN/AP 39/46 6/7/2018

Anticipate No Profits but Provide for all Losses Accountant should always be on side of safety. Dr. G. MAHESWARAN/AP 40/46 6/7/2018

Making Provision for Bad and Doubtful Debts For Example Making Provision for Bad and Doubtful Debts Showing Depreciation on Fixed Assets, but not appreciation Dr. G. MAHESWARAN/AP 41/46 6/7/2018

Consistency Dr. G. MAHESWARAN/AP 42/46 6/7/2018

The accounting practices and methods should remain consistent from one accounting period to another. Whatever accounting practice is followed by the business enterprise, should be followed on a consistent basis from year to year. Dr. G. MAHESWARAN/AP 43/46 6/7/2018

Method of Depreciation followed For Example 2009-10 Straight Line Method 2010-11 Written Down Value Method 2011-12 Units of Measure Method Year Method of Depreciation followed Dr. G. MAHESWARAN/AP 44/46 6/7/2018

Thank you Dr. G. MAHESWARAN/AP 45/45 6/7/2018