what are concepts and conventions of accounting

The process of converting the financial transactions into
financial statements is ruled by principles called
accounting concepts and conventions:

• Business Entity Concept
• Dual Aspect Concept
• Accrual Concept
• Money Measurement Concept
• Matching Concept
• Conservative Convention


concepts are going concern concept,cost concept,business
entity concept.
conventions are convention of disclosure,convention of
conservatisim

Accounting Concepts
1-Business Entity COncept
2-Dual Aspects Concepts or Accounting Equation Concepts or
Balance Sheet Concept
3-Going Concern COncept
4-COst COncept
5-Money Measurement COncept
6-Accounting Period Concept
Accounting Conventions
1-Convention OF consistency
2-Convention OF disclosure
3-Convention OF Materiality
4-Convention OF Conservatism


Accounting Concepts
The American Institute of Certified Public Accountants
defines accounting as “the art of recording, classifying and
summarising in a significant manner and in terms of money
transactions and events, which are, in part at least, of a
financial character, and interpreting the results thereof “.
A business house must necessarily keep a systematic record
of its day-to-day transactions to enable stakeholders to get
a complete financial picture of the company and to take
stock of its financial position on a periodic basis.
Stakeholders include the company’s promoters, shareholders,
creditors, employees, government and the public.
The accounting practice is based on certain standard
concepts, which enable accountants to convey meaningful
information to all stakeholders. These concepts are as
follows: -
· The business entity concept – According to this, the
business is treated as a distinct entity from its owners.
This enables the business to segregate the transactions of
the company from the private transactions of the proprietor(s).
· The money measurement concept – Only those transactions,
which are expressed in monetary terms are recorded in the
books of accounting. Money is the common unit, which enables
various items of diverse nature to be summed up together and
dealt with.
· The cost concept – The transactions are recorded at the
amounts actually involved. For instance, a piece of land may
have been purchased at Rs.1,50,000, whereas the company
considers it to be worth Rs.3,00,000. The land is recorded
in the books of accounts at Rs.1,50,000 only. Thus, an
arbitrary valuation of the company’s assets is avoided by
recording the value at the actual amount involved. Since
this amount would have been mutually agreed upon by both the
parties involved in the transaction, it is an objective
valuation.
· The going concern concept – According to this concept, it
is assumed that the business will exist for a long time and
transactions are recorded on this basis. This concept forms
the basis for the distinction between expenditure that will
yield benefit over a long period of time and expenditure
whose benefit will be exhausted in the short-term.
· The dual aspect concept – Business firms raise funds in
any of the following ways–
o Additional capital (increase in owners’ equity)
o Earning revenue (increase in owners’ equity)
o Profits (increase in owners’ equity)
o Additional loans (increases outside liability)
o Disposing off assets (reduces assets)
An increase in liabilities (including owners’ equity) and
reduction in assets represent sources of funds. These funds
can be put to any of the following uses –
o Purchasing of assets (increase in assets)
o Cash balances (increase in assets)
o Operational expenses (decrease in owners’ equity)
o Clearing liabilities due (decrease in liabilities)
o Losses (decrease in owners’ equity)
All increases in assets and decreases in liabilities
(including owners’ equity) represent the uses of funds.
The sum of the sources of funds equals the sum of the uses
of funds. Thus, the dual aspect of accounting means that
Owner’s Equity + Outside Liability = Assets
This is the fundamental accounting equation.
· The realisation concept – Accounting records transactions
from the historical perspective, i.e. it records
transactions that have already occurred. It does not attempt
to forecast events; this prevents the business from
presenting inflated profits based on their expectations. A
transaction is recorded only on receipt of cash or a legal
obligation to pay. Until then, no income or profit can be
said to have arisen.
· The accounting period concept – Business firms prepare
their income statements for a particular period. This
period, known as the accounting period, is usually the
calendar year (January 1 to December 31) or the financial
year (April 1 to March 31). Some firms, like trading firms
have shorter periods such as a month or less, while others
may have longer terms. The Companies Act, 1956 has set a
maximum limit of 15 months for the accounting period.
· The matching concept – According to this concept, expenses
borne in the production of goods and services should be
matched with revenues realised from the sale of these goods
and services. This helps determine the profits or losses for
a particular accounting period.
· The conservatism concept – According to this concept,
revenues should be recognised only when they are realized,
while expenses should be recognized as soon as they are
reasonably possible. For instance, suppose a firm sells 100
units of a product on credit for Rs.10,000. Until the
payment is received, it will not be recorded in the
accounting books. However, if the firm receives information
that the customer has lost his assets and is likely to
default the payment, the possible loss is immediately
provided for in the firm’s books.
· The consistency concept – Once the firm adopts a
particular method for a particular event, it will handle
subsequent events of that type the same manner. For
instance, suppose it provides for depreciation through the
straight-line method, it will follow that method in the
subsequent years as well, unless it has sufficient reason to
change the method.
· The materiality concept – According to this concept, the
firm need not record events, which are insignificant and
immaterial. For instance, if a large manufacturing firm has
accounts receivables worth crores of rupees, it would not
find it necessary to provide for a possible bad debt worth
Rs.100.

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Accounting Concepts and its Main importance

Definition of Accounting Concepts

Accounting concepts means flow of thoughts of all wise accounting professionals of this world . It can also be interpreted as "process of understanding of accounting to make sense of universal acceptability. "
In other words accounting concepts some normal rules which can be changed but which has come in to existence with so many hard work of accountants in past. These are basics thoughts of an accountant.

Types of Accounting Concepts

To know more about Accounting Concepts are very necessary to learn because without this you can not understand the fundamentals of accounting. There are many concepts which an accountant uses in their accounting working.

1st concept – Separate entity concept

Under this concept the entity of business man is separate from its business. The main reason is that owner is just giver of capital but if he withdraws without any restriction or any control. Business can dissolve within two days. So every transaction related to withdrawing money from business must be recorded by accountant. So this concept gives us basic knowledge while we are recording transactions in our books that we must know that concern has its own entity and our duty is to record every transaction even it is related to owner or not . Businessman's capital is also the liability of business and if he withdraw for personal use , it is known as drawing and it is deducted from his capital . So under this concept , accountant records every cash , goods and usage of fixed assets for personal use of businessman and while he makes balance sheet all these expenses are deducted from businessman's capital .

2nd Concept – Cost Concept

Under this concept we record all assets on their cost not in market value. This concept is very useful for stable recording of accounting .Because if all transaction recording will start on their market value then it create tension to accountant. Because nobody can say what will the price of your fixed asset in next day. So record all assets on their original cost. But time to time depreciation is deducted from this . But we never record all assets on their market price .

3rd Concept – Matching Concept

When I was doing graduate from my college, my respected teacher taught me that matching concept is very important for an accountant. It means we will compare all expenses with the incomes of business. After matching or compare, it will provide you the real result of performance of business. We can say it profit or loss . So If today you want to know profit or loss of your business, let us start match of your business incomes with your business expenses.

4th Concept – Conservatism Concept

This concept is made when accountant thought that it is very important to secure our business. The risk of business is called losses. So it is the basic duty of accountant to secure his business from different losses. For securing Loss he can make different provisions like provision for doubtful debts, provision for depreciation reserve for contingent liabilities.

Now you are in position to understand different types of concepts for accounting profession. You are also an accountant , you can also make your accounting concepts. I hope, you will make certain new accounting concepts which will very useful for accounting and accounting profession.

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Accounting Concepts

Accounting has come to present status after a period of several hundred years. During this period certain accounting assumptions, concepts and conventions have emerged. Accounting assumptions, concepts and conventions are called Generally Accepted Accounting Principles (GAAP) since they have been commonly accepted by professional accounting world as general guidelines for preparing financial statements and reports. Thus accounting principles are rules of action adopted by accountants.

Basic Accounting Concepts

Entity Concept:

In accounting, the entity of business is considered separate from the existence of its owners. Accounts are kept for the entity as distinct from owners. Thus, money invested by the proprietor by way of capital is considered to be the liability of the business to the proprietor. If proprietor withdraws some cash or goods, they are treated as drawings but not as business expense. Capital is reduced by the amount of drawings.

Going Concern Concept:

This concept assumes that the business will exist for certain foreseeable future with the specified goal or for specified duration. Thus recording and valuation of long-term assets and liabilities are based on this assumption. Fixed assets are recorded on historical costs and written down over the expected life of the assets. Similarly long-term liabilities, i.e., debentures, preference shares, long-term loans are raised and their terms of repayment are settled on this assumption. The going concern concept is the backbone of accounting and is based on the following assumptions:

Business has an indefinite life.
Assets are depreciated on the basis of their expected life without caring for their current values.
In case of innovations or new inventions, their effect is measured in financial terms and assets are depreciated to allow for such innovations or inventions.

Money Measurement Concept:

In accounting, a record is made only of those facts or transactions that can be expressed in monetary terms. It provides a common yardstick, i.e., money for measuring, recording and summarizing the transaction. Events, which cannot be expressed in money terms, do not find a place in account books. For example, salary paid to manager is recorded in account books but his competence

Cost Concept:

According to this concept, all transactions and events are recorded in the book” of account at the actual price involved. This price is called cost. All assets are carried in the books of accounts from year to year at their acquisition cost (also called historical cost) irrespective of any change in their market value. Acquisition cost is considered highly objective, reliable, definite and free from bias. Thus when a machine is purchased for Rs. 5 lakhs, transportation expenses are Rs. 20,000, installation expenses are Rs. 10,000, the machine is valued at Rs. 5,30,000. This is the historical cost of machine.

Dual Aspect Concept :( Double Entry System)

Every transaction entered into by a firm has two aspects, viz., debit and credit. Debit represents creation of or addition to an asset or an expense or the reduction or elimination of a liability. Credit means reduction or elimination of an asset or an expense or the creation of or addition of a liability. Therefore, according to dual aspect concept, at any time, the total assets of a business are equal to its total liabilities. In the equation form:

Assets = Capital + Liabilities
Assets denote the resources owned by a business while the term liability refers to external claim. And capital is the claim of the owners against the assets of the business.

Accounting Period Concept:

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. This is necessary for
different purposes like, calculation of profit, ascertaining financial position, tax computation etc. Further, this concept
assumes that, indefinite life of business is divided into parts. These parts are known as Accounting Period. It may be
of one year, six months, three months, one month, etc. But usually one year is taken as one accounting period which
may be a calendar year or a financial year.

Periodic Matching Concept and revenue concept:

The objective of running business is to earn profit in order to ascertain the profit made by the business during a period. It is necessary that the revenues of the period should be matched with the cost (Expenses) of the period. The term matching means appropriate association of related revenues and expenses.

Realization Concept:

Revenue is recognized when a sale is made. Sale is consider to be made at the point when the property in good passes to the buyer and he becomes legally liable to pay.

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