1. UNIT – I Accounting Concepts
DEPARTMENT OF MANAGEMENT STUDIES
UNIT – I Accounting Concepts
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2. Accounting Concepts
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3. 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.
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4. Business Entity Concept
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5. The business and its owner(s) are two separate entities
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6. The Books Of Accounts are prepared from the point of view of the business
Hence…
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7. Capital (Liability) Drawings (Asset) 7/46 Dr. G. MAHESWARAN/AP
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8. 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.
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9. Going Concern Concept
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10. 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.
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11. Money Measurement Concept
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12. In accounting, a record is made only of those transactions or events which can be measured and expressed in terms of money.
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13. Non monetary transactions are not recorded in accounting.
Innovativeness
Attitude
Experience
Team work
skill
Honesty
Passion
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14. Accounting Period Concept
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15. For measuring the financial results of a business periodically, the working life of an undertaking is split into convenient short periods called accounting period.
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16. Dr. G. MAHESWARAN/AP
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17. Cost Concept
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18. 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.
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19. Historical Cost Of
Market Value Of
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20. Dual - Aspect Concept
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21. For Every Debit, there is a Credit
Every transaction should have a two- sided effect to the extent of same amount
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22. 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
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23. 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
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24. This Concept has resulted in
THE ACCOUNTING EQUATION
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26. Realisation Concept
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27. 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.
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28. Matching Concept
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29. 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.
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30. Salary paid in 2012-13 relating to 2011-12
For Example
Salary paid in relating to
Such salary is treated as Expenditure for under Outstanding Salaries Account, not for the year
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31. Accounting Conventions
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32. 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.
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33. Materiality
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34. 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.
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35. 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.
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36. Full Disclosure
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37. Financial Statements and their notes should present all information that is relevant and material to the user’s understanding of the statements.
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39. Conservatism
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40. Anticipate No Profits but Provide for all Losses
Accountant should always be on side of safety.
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41. Making Provision for Bad and Doubtful Debts
For Example
Making Provision for Bad and Doubtful Debts
Showing Depreciation on Fixed Assets, but not appreciation
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42. Consistency
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43. 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.
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44. Method of Depreciation followed
For Example
Straight Line Method
Written Down Value Method
Units of Measure Method
Year
Method of Depreciation followed
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45. Thank you
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