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It is the art of recording, classifying,

summarizing and interpreting in a significant
manner and in monetary terms.
 ë
ectives of Accounting
To keep systematic records.
To protect usiness properties.
To ascertain the operational profit or loss.
To ascertain the financial position of usiness.
To help in decision making.
 ïsers of Accounting information
Proprietors
Managers
Creditors
Prospective investors
Employees
Government
Citizens
 Äiff. etween Financial A/c &
Management A/c
(

   
   
ë
ectives Provides information to For internal use y the
external parties. management.
Analyzing performance Paints overall picture. Analyses at a
departmental/divisional
level.
Äata used ënly past monetary data. Past data and future
pro
ections.
Monetary measurement ënly events of monetary Events of monetary and
value recorded. non-monetary values
recorded.
Periodicity of reporting Longer- yearly or half Shorter- according to the
yearly. needs of the organization.
Nature ë
ective. Su
ective.
Legal compulsion Compulsory . Non- compulsory.
 (ookkeeping Vs Accounting
(ookkeeping is the recording of financial transactions
accordance with some predefined rules. Transactions
include sales, purchases, income, and payments y an
individual or organization. (ookkeeping is usually
performed y a ookkeeper.
Accounting is the process of deriving the financial
statements that emerge from the ook keeping records.
It is performed y an accountant.
 Öoles of an Accountant
Maintenance of ooks of accounts
Auditing of accounts
Taxation
Financial services
 GAAP
(Generally Accepted Accounting Principles)
What is GAAP?
A set of standards generally accepted and
universally practiced y accountants
Indicates how economic events are reported
Generated y the Financial Accounting
Standards (oard (FAS() and Securities &
Exchange Commission (SEC)
 Accounting Principles

Concepts Conventions

Separate Entity Conservatism

Going concern Full Äisclosure
Money Measurement Consistency
Cost Materiality
Äual Aspect
Accounting Period
Periodic Matching of
Costs & Öevenue
Öealisation
 Separate Entity concept

This concept implies that the affairs of a

usiness are to e treated as eing separate
from the non- usiness activities of its owners.
Personal transactions of the owner should not
e included.
 Separate entity concept

e.g.
A director͛s private car should
not e included in the fixed
assets of the company.
 Going concern concept

This concept implies that the usiness will

continue to operate for the foreseea le future.
Äepreciation on fixed assets is in the asis of
the expected live rather than the market value.
An enterprise will not e considered as a
going concern when it as gone into liquidation
or it has ecome insolvent.
 Going concern concept

e.g.
Fixed assets are
shown at cost less
accumulated
depreciation.
 Money measurement concept

It can e measured only in monetary value.

Events or transactions which cannot e
expressed in money is not recorded.
It helps in understanding the state of affairs of
the usiness in a much etter way.
 Money measurement concept

e.g.
Accounting doesn͛t tell how good the
quality of employees͛ skills are
although this is important for the
success of a usiness.
 = 


Assets are always shown at their cost price rather

than their market price
Every transaction must e recorded at its acquisition
price.
This does not mean that the asset will always e
shown at the cost price. It means that the asset is
recorded at its cost price and is systematically
reduced or increases in value y charging
depreciation/appreciation.
This is applica le to fixed assets and not the current
assets.
 Cost concept
E.g.
If a piece of land is acquired for Ös.50,000, it
will e recorded at the acquisition cost
regardless of the market value. ënly
depreciation/appreciation will e ad
usted.
 Äual Aspect Concept
The value of the assets owned y the
company is equal to the claims on these
assets.
This is the asic concept of accounting.
Every Är entry has its corresponding Cr entry.
This concept can e expressed as
ASSETS = CAPITAL + LIA(ILITIES
 Äual aspect concept
E.g.
When an item is sold there is an inflow and
outflow of assets.
The asset outflow is goods and the inflow is
cash.
(oth the aspects of the transaction will e
recorded, hence the name ʹ Äual aspect
concept.
 Accounting Period Concept
›

 
 

  
 

 


.
At the end of each period an income
statement and alance sheet are prepared for
finding the profit and loss and financial
position of the usiness as on the last day of
the accounting period.
 Accounting period concept
E.g.
The usual period of accounting is usually a
year, ut in case of large firms it is more
frequent ʹ quarterly or monthly.
 Matching Concept
Matching means appropriate association of
related revenues and expenses.
The profit of the usiness is ascertained only
when the revenue earned during a particular
period is compared with the expenditure
incurred for earning that particular revenue.
 The Öealisation concept
This concept holds to the view that profit can
only e taken into account when realisation
has occurred.
Generally, sales revenue arising from the sale
of goods is recognised when the goods are
delivered to the customers.
 The Öealisation concept
e.g.
Profit is earned when goods or
services are provided to
customers. Thus it is incorrect
to record profit when order is
received, or when the
customer pays for the goods.
Conventions
 Conservatism

Anticipate the profits ut provide for all

losses.
The conservatism concept means that
normally the accountant will take the figure
which will understate rather than overstate
the profit.
Provision is made for all known lia ilities.
 Conservatism

E.g.
Provision for dou tful de ts
should e deducted from
de tors in alance sheet.
 Äisclosure

The financial statements of a firm must

include all information necessary for the
formation of valid decisions y the users.
Any information that might e relevant to an
investor or creditor should e disclosed,
either in the ody of the financial
statements or in the notes attached thereto.
 Consistency
When a firm has once fixed a method for the
accounting treatment of an item, it will enter all
similar items that follow in exactly the same way.
Frequent changes in the accounting methods would
lead to misleading profits calculated from the
accounting records.
It states that when a firm has chosen a method for
the accounting treatment of an item, all similar items
should e treated in the same way.
 Consistency

E.g.

Äepreciation method of
certain fixed assets once
adopted should e used in
the following years.
 Materiality

Financial statement should separately disclose

significant items for they would influence
decisions of users.
Accounting does not serve a useful purpose if
the effort of recording a transaction in a
certain way is not worthwhile.
In other words do not waste your time in the
ela orate recording of trivial items.
 Materiality

e.g.
A stock of stationery
worth Ös.10 should
e treated as an
expense when it was
ought.