Accounting Concepts, Principle & Conventions
Accounting is the language of business by which a business house communicates with the outside world. To make this language commonly understood by all, it is necessary that it should be based on certain uniform standards. These standards are known as accounting principles. Accounting principles are guidelines to establish standards for good accounting practices. These principles can be classified into
(i) Accounting concepts; and
(ii) Accounting conventions.
1. Business Entity Concept
According to this assumption, for accounting purposes a business is treated as a separate entity that is distinct from its owner (s) and all other economic proprietors. For example in case of a proprietary concern, though the legal entity of the business and its proprietor is not same for the purpose of accounting they are o be treated as separating from each other.
2. Money Measurement Concept
According to this assumption only those transactions which are capable of being expressed in terms of money are included in the accounting records. For example if the sale director is not in speaking terms with the production director, the enterprise is bound to suffer. Since monetary measurement of this information is not possible, this fact is not recorded in accounting records
3. Accounting period assumption.
This assumption is also known as periodicity assumption or time period assumption. According to this assumption the economic life of an enterprise is artificially split into periodic intervals which are known as accounting periods at the end of which an income statement and position statement are prepared to show the performance and financial position. The use of this assumption further requires the allocation of expenses between capital and revenue
4. Going concern assumption
This assumption is also known as continuity assumption. According to his assumption, the enterprise is normally viewed as a going concern, i.e. continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the income following the concept of accounting period is more an estimate than factual since actual income can be determined only on the liquidation of the enterprise
Revenue Recognition principle
As per this principle revenue is recognized when the other party becomes legally liable to pay amount. This concept implies that sale will not be considered when the order is received it will only be considered when the delivery is made and the other party is legally liable to pay amount.
5. Cost Concept
According to this principle, an asset is recorded at the price paid to acquire it at the time of its acquisition and the cost becomes the basis for the accounts during the period of acquisition and subsequent accounting periods
6. Matching principle
Income made by the business during a period can be ascertained only when the revenue earned during a period is compared with the expenditure incurred for earning that revenue
7. Objectivity Principle
According to this principle the accounting data should be definite, variable and free from the personal bias of the measures. In other words, this principle requires that each recorded transaction/event in the books of accounts should have adequate evidence to support it.
8. Accrual Concept.
Revenues and costs are accrued i.e. recognized as they are earned or incurred and not as money is received or paid and recorded in the financial statements of the periods to which they relate. This assumption is the core of accrual accounting system.
9. Dual Aspect Concept
As per this concept every transaction has two effects
• Effect of Giving
• Effect of Receiving
Accounting records both these aspects one denoting Debit and other Credit following the rules of debit and credit.
Accounting discourages accountants and managers to be too much optimistic and tries to make business funds available to survive any setback or loss in the business.
Due to this reason, accountants follows the rule ‘TO ANTICIPATE NO PROFIT BUT PROVIDE FOR ALL POSSIBLE LOSSES’ while recording business transactions.
2. FULL DISCLOSURE:
According to this convention accounting reports should disclose fully and fair information about the business. They should be honestly prepared, and sufficiently disclose information which is of material interest to proprietors, present’ and potential creditors and investors for making their decisions.
As per this convention the accounting practices should remain unchanged from one period to another.
Accordingly to this convention the accountant should attach importance to material details and ignore insignificant details. This is because otherwise accounting will be unnecessarily overburdened with minute details.
These online MCQ Mock tests and MCQ questions includes all main concepts of the chapter in CS foundation Financial Accounting and Auditing.