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Published on April 25, 2012

Author: soumendra.roy


ACCOUNTING CONCEPTS AND CONVENTIONS: ACCOUNTING CONCEPTS AND CONVENTIONS SOUMENDRA ROY NIMS THE BUSINESS ENTITY CONCEPT : 4/25/2012 Soumendra Roy NIMS 2 THE BUSINESS ENTITY CONCEPT This concept starts with the fact that the organization is a separate entity with its own identity Accounts and transactions are classified and analyzed from the point of view of the entity. Books and accounts which are the records of the business, clearly identify the business entity to which the statements are related. MONEY MEASUREMENT CONCEPT : 4/25/2012 Soumendra Roy NIMS 3 MONEY MEASUREMENT CONCEPT Money is the medium of exchange and the standard of economic value. This concept requires that those transactions alone that are capable of being measured in terms of money are only to be recorded in the books of accounts. DUAL ASPECT CONCEPT : 4/25/2012 Soumendra Roy NIMS 4 DUAL ASPECT CONCEPT The claims against the assets of a business unit are by the creditors and the owners. The total assets of a business are equal to its total liabilities. Liabilities to outsiders are known as liabilities but liabilities to the owner, in accounting parlance, are referred to as capital. This concept expresses the relationship that exists among assets, liabilities and the capital in the form of an accounting equation which is expressed in the simplest form as under: ASSETS = LIABILITIES + CAPITAL OR CAPITAL = ASSETS – LIABILITIES ACCOUNTING EQUIVALENCE: 4/25/2012 Soumendra Roy NIMS 5 ACCOUNTING EQUIVALENCE Assets = Owner’s Equity + Outside Liabilities A = OE + OL DOUBLE ENTRY SYSTEM: 4/25/2012 Soumendra Roy NIMS 6 DOUBLE ENTRY SYSTEM A = OE + OL In the double-entry accounting system, every transaction is recorded by equal amounts of debits and credits. Debit = Credit GOING CONCERN CONCEPT : 4/25/2012 Soumendra Roy NIMS 7 GOING CONCERN CONCEPT This concept assumes that the business will continue in operation for as long as possible and will not be dissolved in the immediate future. From the accountant’s standpoint, Profit and Loss Account and Balance Sheet are drawn up on the assumption that the business unit will be kept continuously alive for the greatest length of time. PERIODICITY CONCEPT : 4/25/2012 Soumendra Roy NIMS 8 PERIODICITY CONCEPT Financial Statements should be prepared at regular intervals to ascertain information about the business for all sorts of purposes – performance evaluation, tax computation, budgetary control and the like. Period-income determination leads to comparisons of the results of successive periods. CONSISTENCY CONCEPT : 4/25/2012 Soumendra Roy NIMS 9 CONSISTENCY CONCEPT Whatever accounting method a business unit decides to adopt, a consistent approach principles and procedures to similar situations to be adopted. Inconsistency in reporting can cause misleading interpretations and therefore, wrong conclusions. MATERIALITY CONCEPT : 4/25/2012 Soumendra Roy NIMS 10 MATERIALITY CONCEPT The concept of materiality is the threshold for recognition of a transaction in accounting process. In the accounting sense, an item is only recorded when it is considered to be useful or important to a user of a financial statement. HISTORICAL COST CONCEPT : 4/25/2012 Soumendra Roy NIMS 11 HISTORICAL COST CONCEPT Historical cost refers to the cost at the time of acquisition. Since accounting is basically the recording of past happening, accountants use the acquisition price as the most objective measurement inasmuch as it is supported by the evidence of a transaction. An asset will ordinarily be recorded at its cost and this cost will be the basis for all subsequent accounting for the asset CONSERVATISM CONCEPT: 4/25/2012 Soumendra Roy NIMS 12 CONSERVATISM CONCEPT Where there is a reasonable choice of accounting treatments, the concept of conservatism refers to early recognition of unfavorable events. This concept requires an accountant to record an event in such a way as will show a weaker state of affairs than what actually exists and thereby drawing attention to events that result in the lowest value of an income. Since this concept requires the accountant to underplay favorable prospects, it is often stated as follows: ‘ Recognize all losses and anticipate no gains ’. REALIZATION CONCEPT : 4/25/2012 Soumendra Roy NIMS 13 REALIZATION CONCEPT This concept is governed by the Concept of Conservatism. Revenue should only be brought into account when it is actually realized. But in future customers may not pay their dues or may return the goods. In fact, the actual income may turn out less than it was thought to be. In principle, revenue can be recognized at the point of sale or at the point when cash is collected or at any intermediate point. PowerPoint Presentation: 4/25/2012 Soumendra Roy NIMS 14 ANY DOUBT??

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