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OMTEX – CLASSES

“T HE HO ME OF T EX T”
F.Y.B.Com THEORY F.Y.B.Com
ACCOUNTING PRINCIPL E S.
Accounting principles are guidelines & standards, which have been
accepted by the accounting profession in preparation and presentation of
accounts of the business. It is approved and normally accepted by the
government bodies & controlling authorities.
Accounting principles are uniform in order to understand in the same
sense by those using it. Also they are not rigid (i.e. inflexible) like principle of
gravity but they are flexible. This is because mainly the account principles are
social science. Accounting principles are not universal and permanent as they are
not discovered but are developed by man from time to time. Thus the
development of accounting principles is a continuous process.
Accounting principles are evolved over the year by following_
1. The Professional Institutions like the
“INSTITUTE OF CHARTERED ACCOUNTANTS OF
INDIA”
2. The legislation of the country like_
“C OM PANY LA W B OARD (C LB) ”
“C EN TRA L BO ARD OF DI RECT T AXES (CB DT)” etc.

ACC OU NT IN G CON CE PT S AND CON VE NS IO NS .


Accounting concepts: - An accounting concepts is a basic assumption concerning
the economic environment in which accounting exists.

Characteristics of Accounting Concepts:-


1. Accounting concepts are continuously changing and evolving: In the event of
rapidly changing economic activities, accounting concepts also undergo frequent
changes. This is a healthy sign for the accounting fields.
This is because of the following two main reasons.
i. It is relatively a new field and hence it is developing with time.
ii. Some aspects tend to change with the changes in social,
economic and commercial conditions.

2. Another important feature of accounting concepts is the interrelationship


among the different concepts. Most of the concepts do not stand by themselves;
they depend on the other concepts to a large extent.

Basic Accounting Concepts.


1. The Business Entity Concept:- Entity concept is an
assumption that for an accounting purposes, the business
is separate and different from that of its owners. The
entity concept is also known as the concept of an
“Enterprise” and is one of the central concepts in
accounting.
The entity concept may be applied to the whole
organization or even to the part of the organization.
Thus according to these concepts the business is
treated as separate unit from that of its owners, creditors,
managers, employees and others.

OMTEX – CLASSES

“T HE HO ME OF T EX T”
F.Y.B.Com THEORY F.Y.B.Com
The entity concepts form the basic for recognition of the
accounting concepts.
2. The Going Concern Concept:- According to this concepts an
enterprises has an unlimited existence. Thus the concept of
Going Concern Continuity can be expr-
ssed as under.
“Unless & until there is evidence to the contrary, an
enterprise must be considered as continuing largely in its
present form and with its present purpose”
There are some undertakings (business) which are
primarily for limited period. Such entities are exceptions.

3. The Money Measurement Concept: - The money


measurement a concept is an assumption that any
accounting transaction is to be measured in money or
money’s worth. It is only when a transaction is measured
that it can be recorded in the books of an enterprise and the
result of the business is determined.
Thus the measurement of a transaction also has to be
in a common denomination (medium). Money is this common
denominations in which transaction are recorded in the
books of account.

4. The concept of Accounting Periodicity: - The determination


of the income of the enterprise cannot be postponed till the
end of the enterprise. Since, according to Going-concern
concept there is no limit for the life of the enterprises.
Hence the economic activities of the business must be
recorded periodically. These period is called as Accounting
period & these Accounting period is normally called as
“Accounting Year” or “Financial Year” or “Fiscal Year”.
It is, within this Accounting Year, that the income &
expenses (i.e.) costs & revenues are matched with
reasonable accuracy to provide significant results.

5. The Historical Cost Concept: - According to Historical cost


concept, all the transactions are recorded in the books at
cost and not at its market value. Thus the underlying ideas
of this concept are two forms.
a. An asset is recorded at the price paid to acquire it i.e. at
cost and
b. This cost is the basis of all the subsequent treatment of
the assets. e.g. depreciation, stock valuation, etc.,

6. The Concept Of Matching Cost and Revenues: - Matching of


Expired cost (i.e., expenses) and revenues for the period’s
determination of income, is one of the most important
concept and procedures of accounting.
This concept follows the accounting period concept i.e.
once an accounting period is determined, within that period,
the revenues and its related costs are matched.
This concepts is one of the most important concept of
accounting and has received major attention of accountants.
Matching of costs and revenue is the ‘Test reading’ of the
results and the success of the business activity. At the same
time, it is one of the most difficult accounting problems.

OMTEX – CLASSES

“T HE HO ME OF T EX T”
F.Y.B.Com THEORY F.Y.B.Com
7. The Accrual Concept
The matching process as discussed above ultimately
results in what is known as the Accrual concept. This
concept is also called the Accrual theory of Accounting or
Accrual Accounting It means a system of recording revenues
and expenses of particular accounting period. Whether or
not they are receive or paid in cash, at the time of
accounting. It is also known as “Mercantile System of
Accounting” as contrasted to “ Cash system of Accounting.
In cash system of accounting, the revenues are recorded
only when received, whether due or not. Payments i.e.
expenses are also recorded irrespective of the fact whether
they pertain to the period concerned or not.
For matching of costs and revenue under accrual
concept, all revenues related to current year, whenever
received, and all costs of the current year, whenever paid,
must be taken into account.

Account ing con vent ions.


Accounting convention is defined as “a rule or practice
which has been sanctioned by general custom or usage.” It
is the rule or statement of practice which adopted as an
accepted method of procedure, either by general agreement
or by common consent, which may be expressed or implied.
Accounting convention is guide to the selection or
application of a procedure.
Following are some of the important accounting
conventions.
i. Conservatism.
ii. Consistency.
iii. Materiality.
Now we see one by one in detail
i. Conservatism.
It is one of the oldest accounting conventions,
resulting from the conservative outlook of the earlier
accountants. This convention requires that the profit should
not be taken into account unless it is actually realised in
cash, while all possible losses must be fully provide for.
This convention is most effectively employed in
valuation of current assets, like stock, debtors, bills
receivables, etc. As seen above, the principle of valuating
stock at “ cost or market value which ever is lower’ is the
result of this convention. The Provision for bad and doubtful
debts is also made according to this convention.
ii. Consistency.
The convention of ‘Consistency’ indicates that a
procedure selected from among several acceptable
alternatives must be followed consistently during the
successive accounting periods. It is one of the most
important accounting conventions arising from established
custom or usage.
Therefore, changes in accounting methods if any, must
be fully disclosed by way of explanatory notes to the
financial statements, together with its effect on the results
for the year as well as financial position.

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“T HE HO ME OF T EX T”
F.Y.B.Com THEORY F.Y.B.Com
iii. Materiality:
The accounting convention of ‘materiality’ means that
the effect of all significant or material transactions must be
reported in conformity with the general accepted accounting
principles.
This convention puts a check on the unnecessary
disclosure in the financial statements. The financial
statements should not be bulky with unnecessary details
which are not material. A separate disclosure would be
necessary, if an item is material in nature. The Companies
Act, 1956 also says that a separate disclosure of items of
income and expenses should be made if it exceeds 1% of
total revenue of the company.