Accounting concept and convention
by Prof. sachin jadhav
Point of discussion…
Meaning & Definition of Book - Keeping
Features of Book - keeping
Objectives of Book - keeping
Meaning & Definition ofAccountancy
Branches of Accounting
Basic accounting Terminologies
Meaning & Definition…
Book keeping is a process of recording business transitions in the booksof
accounts in a very systematic manner
According to J.R. Batilobi :
“ Book – Keeping is an art of recording business dealings in a set
of books.”
According to Nocth Cott :
“ Book – Keeping is an art of recording in the books of accounts
the monetary aspects of commercial or financial transactions.”
Features of Book keeping
1、It is the process of recording business transition
2、Monetary transactions are only recorded
3、Recording is made in given set of books of accounts
4、For specific period
5、Art of recording business transactions scientifically
Objectives of Book keeping …
Permanent record
To know the P&L
To know the total amount of Capital
To know the total assets and liabilities
To know the progress of the business
To know Legal requirement and tax liabilites
Meaning & Definition of Accountancy
Accountancy includes Book keeping & classifying, summarizing and
interpreting of the business transactions.
According to Kohler :
“ Accountancy refers to the entire body of theory and process of
accounting.”
According to Robert N. Anthony :
“ Nearly every business enterprise has an accounting system. It is
a means of collecting, summarizing, analyzing and reporting in
monetary terms information about the business transactions,”
Branches of Accounting
FinancialAccounting Cost Accounting ManagementAccounting
Journal Cost Sheet Ratio analysis
Ledger Job & Contract Break even point
Trial balance Process Costing Standard Costing
Final accounts Operating Costing Analysis of financial S
Basic accounting Terminologies
Business Transaction
Entry & Narration
Goods
Profit & Loss
Assets, Liabilities & Net worth
Capital & Drawing
Expenditure and types of expenditure
Discount
Good will
Bad debts
Debtors and creditors
Solvent & Insolvent
Accounting Year
Folio, Insurance, Freight Deposit
Business Transaction
Any dealing of business that involves buying and selling of goods and
services in exchange of value be called as business transaction.
Cash Transaction
Credit Transactions
Entry, Narration & Goods
Entry : Recording of transaction in the proper form or method in the books
of accounts is called an entry. It is a first record of any business transaction
in the books of accounts
Narration : A brief explanation of the business transaction for which an
entry is passed is called as a narration. It starts with a word ‘Being’(….)
Goods: The commodities or articles in which the trader deals are called as
goods for that business
Profit & Loss
Profit : Excess of income over the expenses during the accounting year is
called a profit
Ex:…..
Loss : Excess of expenses over the income is called loss
Ex:…..
Assets, Liabilities & Net worth
Assets : Property of any kind owned by a businessman is called an asset,
Ex……
Liabilities : Total amount payable by the business to others is known as
liability
Ex…..
Net Worth or owned equity : The amount of fund provided by the
proprietor in the business is called as net worth or capital also
Types of Assets
Assets : Property of any kind owned by a businessman is called an asset,
Ex……
Fixed Assets : Ex…..
Current Assets : Ex…..
Fictitious Assets : Ex…..
Accounting concept
Accounting principles are those rules which are to be adopted by the
accountants
Accounting is the language of business. This are general guidelinesfor
sound accounting practices
1) Reliable financial statements
2) Generally acceptable basis of measurement
3) Valid and appropriate assumptions
4) Uniformity in presentation
5) Valid and appropriate assumptions
6) Proper information to all
Classifications of Account
Analysis of Transactions
Accounting concepts
1) Business entity
2) Money measurement
3) Cost concept
4) Consistency concept
5) Conservatism
6) Going concern
7) Realization
8) Accrual
9) Dual aspect
10) Disclosure
11) Materiality
12) Revenue recognition principle
13) Marching principle
14) Accounting standards
Business entity concept:
This concept assumes that, for accounting purposes, the business
enterprise and its owners are two separate independent entities. Thus, the
business and personal transactions of its owner are separate.
For example, when the owner invests money in the business, it is recorded
as liability of the business to the owner. Similarly, when the owner takes
away from the business cash/goods for his/her personal use, it is not treated
as business expense.
Money Measurement concept:
This concept assumes that all business transactions
must be in terms of money.
In our country such transactions are in terms 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
Going concern concept
This concept states that a business firm will continue to carry on its activities
for an Future 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 provides a basis for showing the value of assets in the
balance sheet.
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 assumption that profits on these transactions are to be
ascertained for a specified period. This is known as accounting period concept.
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.
Accounting cost concept
Accounting cost concept states that all assets are recorded in the books of
accounts at their purchase price, which includes 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 the
books of accounts at a price paid for them.
For example, a machine was purchased by XYZ Limited for Rs.500000, for
manufacturing shoes. An amount of Rs.1,000 were spent on transporting the
machine to the factory site. In addition, Rs.2000 were spent on its installation.
The total amount at which the machine will be recorded in the books of
accounts would be the sum of all these items i.e. Rs.503000. This cost is also
known as historical cost.
Matching Concept:
The matching concept states that the revenue and the expenses incurred to
earn the revenues must belong to 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/not paid during the year should be taken into
account while ascertaining profit or loss for that year.
Dual aspect concept
Dual aspect is the foundation or basic principle of accounting. It provides the
very basis of recording business transactions in the books of accounts. This
concept assumes that every transaction has a dual effect, i.e. it affects two
accounts in their respective opposite sides. Therefore, the transaction should
be recorded at two places. It means, both the aspects of the transaction must be
recorded in the books of accounts. For example, goods purchased for cash has
two aspects which are (i) Giving of cash (ii) Receiving of goods.
These two aspects are to be recorded. Thus, the duality concept is commonly
expressed in terms of fundamental accounting equation
Assets = Liabilities + Capital
Realisation concept
This concept holds to the view that profit can only be taken into
account when realization has occurred. According to this concept
revenue is recognized when a sale is made. Sale is considered to be
made at the point when the property in goods passes to the buyer
and he becomes legally liable to pay.
Revenue is said to have been realized when cash has been received
or right to receive cash on the sale of goods or services or both has
been created
Conservatism
The convention is the based on principle that,
“Anticipate no profit, but provide for all possible losses”. It provides guidance for
recording transactions in the books of accounts. It is based on the policy of playing
safe in regard to showing profit. The main objective of this convention is to show
minimum profit. Profit should not be overstated.
If profit shows more than actual, it may lead to distribution of dividend out of
capital. This is not a fair policy and it will lead to the reduction in the capital of the
enterprise
Consistency
The convention of consistency means that same accounting principles should be used
for preparing financial statements year after year. For example: if a stock is valued
at “cost or market price whichever is less”, this principle should be followed year
after year.
Example : under deprecation used fixed installment method.
Materiality
The convention of materiality states that, to make financial statements
meaningful, only material fact i.e. important and relevant information
should be supplied to the users of accounting information. The question that
arises here is what is a material fact. The materiality of a fact depends on its
nature and the amount involved.
Material fact means the information of which will influence the decision of
its user..
Inflation Accounting
DEFINITION OF INFLATION ACCOUNTING:
A state in which the value of money is falling that is prices are rising.
A process of steadily rising prices resulting in diminishing purchasing power of a given
nominalsum of money.
Objective:
1) The user or decision maker gets an information which shows the
performance.
2) To facilitate the comparison of the performance oftwo different
periods it is necessary that the figures are adjusted for inflation.
3) The monetary items, income & expenses do not show the correct
purchasing power of money therefore, theirvalues should be adjusted.
ADVANTAGES
• It enables the maintenance of capital intactwhich is essential in a
limited liabilitybusiness.
• Profit/loss is determined by matching the cost &the revenue at
current values which are comparable.
• The assets are shown at real values uniformly instead of at distorted values.
• Trade unions, employees, shareholders & publicare not misled by giving an
exaggerated profitfigures.
• By showing the current values of fixed assets it enables the establishment of
realistic price for the company’s shares
DISADVANTAGES
• Depreciation being the process of distribution oforiginal cost,
charging anything in excess does not fit into the concept of
depreciation.
• Replacement cost is an indefinite figure closured by future
technological developments & the time period at which the asset will
bescrapped.
• Charging depreciation on replacement cost basis will be
acceptable to income-tax authorities & hence there is no purpose
in doing theexercise.
