Accountingtheory

-BY RUTUJA. K NITEEN. P RAJAT.i KUSHAL.M R.No. 257 R.No. 305 R.No. 296 R.No. 448 B.COM 2nd SEM

CONCEPTS CONVENTIONS

ACCOUNTING PRINCIPLES

CONCEPTSCONCEPTS

The term ‘concept’ is used to connote

accounting postulates, that is necessary

assumptions and conditions upon which accounting

is based.

RUTUJA

BUSINESS ENTITY CONCEPT

The business and its owner(s) are two separate

existence entity. Any private and personal incomes and

expenses of the owner(s) should not be treated as the

incomes and expenses of the business.

BUSINESS OWNER / INDIVIDUAL

NITIN

GOING CONCEPT

It is assumed that the firm is a going concern

and its business will continue for a long period (indefinite

time). As per this concept, fixed assets are recorded at their

original cost & depreciation is charged on these assets.

FIRMFIRMTIME PERIOD 1 2 3 4 5 6 7 8 and so on…….

RAJAT

MONEY MEASUREMENT CONCEPT

An Accounting record is made only of Information

which that can be expressed in monetary terms. All

transactions of the business are recorded in terms of

money.

RUTUJA

COST CONCEPT

Assets should be shown on the balance sheet

at the cost of purchase instead of current value .The

cost of fixed assets is recorded at the date of

acquisition cost.

time passage

ASSET

CURRENT PRICERs 7000

*And firm is going concern

NITIN

PURCHASED AT Rs 5000

Queries ? Any

RAJAT

Mr. Lobo owns XYZ Co. He draws a cheque from his

S/B a/c and purchases a bike to fulfill his son’s want /

need. Is his transaction recorded in the firms book ?

NONO BUSINESS ENTITY CONCEPT

BUSINESS ENTITY CONCEPTAs per

Business and individual are two separate entity.

Here fulfilling his son’s need is his personal concern.

RUTUJA

It is generally assumed that the business will not

liquidate in foreseeable future, as per which concept ?

GOING CONCEPTGOING CONCEPT

As it is assumed that business will run for undefined period.

NITIN

Are Qualitative transactions recorded in accounts ? For

ex: knowledge, stress level etc

NONOMONEY

MEASUREMENT CONCEPT

MONEY MEASUREMENT

CONCEPTAs per

As this concept says record only monetary

transactions.

Here Qualitative things cannot be determined in

monetary terms.

RAJAT

A machine was purchased (asset) on 1.1.2012 for Rs

3Lakh (including expenses such as loading + installation).

The market value of the machine on 1.3.2012 was

estimated at Rs 3.5Lakh . While finalizing the account the

machine was recorded at Rs 3.5Lakh in the books. Is

the recorded transaction correct?

Assets should be valued at the price paid to

acquire them.

Here acquired value is 3lakh , and hence it should

be recorded.

COST CONCEPTCOST CONCEPT Violation of NONO

DUAL ASPECT CONCEPT

Every transaction recorded in books affects at

least two accounts. If one is debited then the other

one is credited with same amount. This system of

recording is known as “DOUBLE ENTRY SYSTEM”.

CCRR

A/c A A/c B

RUTUJA

ACCOUNTING PERIOD CONCEPT

Monitoring the performance of the organization

periodically i.e.

Entire life of the firm is divided into time intervals for

ascertaining the profits / losses are known as

accounting periods.

Accounting period is of two types:

NITIN

MATCHING CONCEPT

The main object of running a business is to

earn profit. Thus all the revenue of a particular period

will be matched with the cost of that period.

Accordingly, for matching costs with revenue, first

revenue should be recognized & then costs incurred

should be recognized.

Advertisement cost 400L

Advertisement cost 400L

100L100L

100L100L

100L100L

100L100L

Revenue is earned for 4

years

Revenue is earned for 4

years

Cost is divided and shown in B/S

for 4 years

Cost is divided and shown in B/S

for 4 years

1st year

3rd year

4th year

2nd year

RAJAT

REALISATION CONCEPT

This concept deals with the problem,

when the revenue should be realized?

Revenue is realized on three basis-:

RUTUJA

ACCRUAL CONCEPT

In this concept revenue is recorded when sales are

made or services are rendered & it is immaterial

whether cash is received or not. In the same way

expenses are recorded in the accounting period in

which they assist in earning the revenues whether the

cash is paid for them or not.

NITIN

OBJECTIVE CONCEPT

Accounting transactions should be recorded in an

objective manner, free from the personal bias of either

management or the accountant who prepares the

accounts. It is possible only when each transaction is

supported by verifiable documents & vouchers such as

cash memos, invoices.

RAJAT

RUTUJA

Which concept givens us accounting equation?

DUAL ASPECT CONCEPTDUAL ASPECT CONCEPT

RAJAT

Economic life of an enterprise is split into the periodic intervals as per -

1st year 2nd year 3rd year 4th year 5th year 6th year

PERIODICITY CONCEPTPERIODICITY CONCEPT

NITIN

A worker of ABC.ltd earns Rs1000 every month. But he

was paid Rs 13,000 for 12 months. How is the transaction

recorded?

Salary a/c DR Rs12,000 ----

Pre-paid salary a/c DR Rs 1,000 ----

To cash/bank a/c ---- Rs13,000

Current year expenses

Next year expenses

Expenses should be recognized when they are incurred, and

not when they are paid.

Here Rs12,000 should be recorded as current year expenses .

But Rs1,000 is paid in adv, so it remains outstanding as it

would incur in next year.

RUTUJA

According to which concept, the accounting

data & accounting information should be

verifiable and free from personal bias?

OBJECTIVE CONCEPTOBJECTIVE CONCEPT

Eg: In the case of fixed assets, the amount

can be verified by purchase bill.

CONVENTIONS

The term ‘convention’ is used to signify

customs and traditions as a guide to the

presentation of accounting statements.

NITIN

CONSERVERTISM / PRUDENCE

All anticipated losses should be recorded but all

anticipated gains should be ignored. Provisions are made

for all losses even though the amount cannot be

determined with certainty.

ANTICIPATED LOSSES

ANTICIPATED LOSSES

ANTICIPATED GAINS

ANTICIPATED GAINS

RAJAT

FULL DISCLOSURE

Information related to the economic affairs of the

enterprise should be completely disclosed which are of

material interest to the users such as Proforma , contents

of balance sheet and P&L a/c prescribed under the

Companies Act 1956.

RUTUJA

CONSISTENCY

Accounting method should remain consistent year by

year. This facilitates comparison in both directions i.e. intra

firm & inter firm. This does not mean that a firm cannot

change the accounting methods according to the changed

circumstances of the business.

VALUATION OF STOCK

DEPRECIATION

1st year 2nd year 3rd year

1st year 2nd year 3rd year

NITIN

MATERIALITY

An item should be regarded as material if there is

reason to believe that knowledge of it would influence

decision of informed investor. It is an exception to the

convention of full disclosure. Items having an

insignificant effect to the user need not to be

disclosed.

RAJAT

RUTUJA

A business man purchases goods(stock) costing Rs

8lac. He sold goods costing worth Rs 6lac. The market

value of the remaining stock was Rs 60,000. During the

accounting year end cl.stock was recorded at cost price. Is

the recorded transaction right?

NONO CONSERVERTISM / PRUDENCE

CONSERVERTISM / PRUDENCEAs per

All anticipated losses are to be recorded.

Here cost price of cl.stock is Rs2lac, but as per the

market value there is a loss of Rs1.4lac. And

thus it should be recorded.

NITIN

From past years Mr.Rustum & Co used to record

their closing stock (inventories) under FIFO method. Due

to current deflation condition, to maintain their same

profits they switched to LIFO method. This leads to

violation which concept?

CONSISTENCY CONVENTIONCONSISTENCY CONVENTION

Change in the method should be done

only if it is required by statute (ICAI) and if

the result is vague /not clear presentation

of financial statement.

RAJAT

The cost of small calculator is accounted as an

expense and not shown as asset in the financial

statement of a business entity due to-

MATERIALITY CONVENTIONMATERIALITY CONVENTIONAs per

As the calculator is immaterial compare to

other costly assets.

REFERENCE :Ms. SUCHETA ONKARI

TEXTS AND NOTES

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