1. STRUCTURE OF ACCOUNTING THEORY

2. ACCOUNTING THEORY -“A systematic statement of the rules or principles which underlie or govern a set of phenomena.” -“A coherent set of hypothetical, conceptual and pragmatic principles forming a general frame of reference for enquiring into the nature of accounting.” - Hendriksen and Breda

3. CLASSIFICATION OF ACCOUNTING THEORY Structural (Syntactical)Theories Interpretational (Semantical) Theories Behavioural (Pragmatic) Theories

4. Decision Theory Measurement Theory Information Theory

6. 1.Early Postulate 2. Going Concern Postulate 3. Unit of Measure Postulate 4. Accounting Period Postulate

7. Accounting Principles 1.Cost Principle 2. Dual – Aspect Principle 3. Accrual Principle 4. Conservatism Principle 5. Matching Principle 6. Objectivity Principle 7. Consistency Principle 8.Full Disclosure Principle 9. Materiality Principle

8. Accounting Concept 1.Business Entity Concept 2. Money Measurement Concept 3.Going Concern Concept 4.Accounting Period Concept 5. Cost Concept 6. Dual Concept 7.Revenue Recognition Concept 8.Matching Concept 9.Accrual Concept 10.Stable Monetary Unit Concept

9. 1. BUSINESS ENTITY POSTULATES 1. BUSINESS ENTITY POSTULATES

14. 2. GOING CONCERN POSTULATES

16. 3. MONEY MEASUREMENT POSTULATES

18. 4. ACCOUNTING PERIOD POSTULATES

19. ACCONTING PERIOD IS OF TWO TYPES-  Financial year (1 st Apr to 31 st March) &  Calendar year (1 st Jan to 31 st Dec)

20. Principles of Accounting General principles: basic assumptions, concepts, and guidelines for preparing financial statements. Usually stem from long-used accounting practice. Specific principles: detailed rules used in reporting business transactions and events. Usually created by a pronouncement from an authoritative body.

21. Principles of Accounting Cost Principle Accounting information is based on actual cost. Cost is measured on a cash or equal-to cash basis Information based on cost is considered objective

22. Principles of Accounting Now Future Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. The assets are reported at cost but not reported at liquidation value that assume closure.

23. Principles of Accounting Revenue Recognition Principle Provides guidance on when a company must recognize revenue. 1.Recognize revenue when it is earned. 2.Proceeds need not be in cash (Credit sales). 3.Measure revenue by cash received plus cash value of items received.

24. Principles of Accounting Business Entity Principle A business is accounted for separately from other business entities, including its owner.

25. Principles of Accounting Monetary Unit Principle Express transactions and events in monetary, or money, units.

26. Objectivity Principle Accounting information is supported by independent, unbiased evidence. It is intended to make financial statements useful by ensuring they report reliable and verifiable information. Source documents.

27. ACCOUNTING CONCEPTS

28. Accounting concepts The word concept means those basic assumptions or conditions upon which the science of concept is based. The following are the important accounting concepts :-

29. Separate entity concept This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate legal entities. Thus the business and personal transactions of its owner are separate.

30. Money measurement concept This concept assumes that all the business transactions must be in terms of money. In our country, such transactions are in term of rupees. Thus as per the money measurement concept, transactions which can be expressed in terms of money are recorded in the books of accounts.

31. Going concern concept This concept states that a business firm will continue to carry on its activities for an indefinite period of time. Simply stated, it means that every business entity has continuity of life. Thus it will not be dissolved in the near future. This is an important assumption of accounting, as it provide a basis of showing the value of asset in the balance sheet.

32. Accounting period concept The life of an entity is divided into short economic time periods on which reporting statements are fashioned. All the transactions are recorded in the books of accounts on the assumptions that profits on these transactions are to be ascertained for a specified period. This is known as accounting period concept.

33. Thus this concept requires that a balance sheet and profit and loss account should be prepared at regular intervals for different purposes, like calculation of profit, ascertaining financial position etc.

34. Accounting cost concept Accounting cost concept states that all assets are recorded in the books of accounts at their purchase price, which include cost of acquisition, transportation and installation and not at its market price. It means that fixed assets like building, plant and machinery, furniture etc are recorded in books of accounts paid for them.

35. Matching concept The matching concept states that the revenue and the expenses incurred to earn the revenues must belong the same accounting period. So once the revenue is realised, the next step is to allocate it to the relevant accounting period. The matching concept implies that all revenues earned during an accounting year, whether received/ not received during that year and all cost incurred whether paid or not paid during that year should be taken into account while ascertaining profit or loss for that year.

36. Dual aspect concept Foundation or the basic principle of accounting. Every transaction has a dual effect, i.e. it effects two accounts in their respective opposite sides. Recorded at two places Both the aspects of transactions must be recorded in the books of accounts Assets = Liability + Capital

37. Realisation concept This concept holds to the view that profit can only be taken into account when realisation has occurred. According to this concept, revenue is recognised when a sale is made. Sale is considered to be made at this point when the property in goods passes to the buyer and he becomes legally liable to pay it. Revenue is said to have been realised when cash have been received and right to receive the cash on the sale of goods and services or both has been created.

38. Accrual Concept Accrual is concerned with expected future cash receipts and payments. Record of all expenses and incomes relating to the accounting period whether actual cash has been disturbed or received or not. Accrual purchases or sales, wages outstanding, interest earned but not received etc.

39. Stable Monetary Unit Concept Accounting presumes that the purchasing power of monetary unit, say rupee, remains the same throughout, thus ignoring the effect of raising or falling purchasing power of monetary unit due to deflation or inflation. Current Purchasing Power method (CPP) and Current Cost Accounting method (CCA) are in evolutionary stage. Thus, for the time being we have to content with the ‘stable monetary unit’ concept.

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