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BASIC ACCOUNTING

CONCEPTS &
CONVENTIONS
• Presentation By

Prof. DEEPAK TANDON

IILM Gurgaon
ACCOUNTING
PRINCIPLES
-related to the growth of the
business
Well being, solvency,earning
potential
Arisen from
experiences,precedents,statements,
INPUT PROCESS OUTPUT

Recording
Economic events Classifying Information to
Measured in Summarising Users
Financial terms Interpreting
PROCESS OF ACCOUNTING
In order to accomplish its main objective of communicating information
to the users accounting performs the following functions:

• Recording It is concerned with the recording of financial


transactions in an orderly manner,soon after their occurrence in the
proper books of accounts.
• Classifying It is concerned with the systematic analysis of
the recorded data so as to accumulate the transactions of similar
type at one place.

• Summarising It is concerned with the preparations and


presentation of classified data in a manner useful to the users.
This function involves of financial statements

• Interpreting The accountant should explain not only what has


happened but also (a)why it happened ,and (b) what is likely to happen
under specified condition
ACCOUNTING CYCLE

Step 1 : JOURNALISING

Step 2: POSTING

Step 3: BALANCING

Step 4: TRIAL BALANCE

Step 5: INCOME STATEMENT

Step 6: BALANCE SHEET


CONCEPTS &
CONVENTIONS
• Concept=Accounting postulates:-
• A.Entity concept
• B.Dual Aspect Concept
• C.Going Concern Concept
• D.Accounting period Concept
• E.Money measurement concept
• F.Cost concept
G.Periodic matching of the cost & revenue
Concept
• H. Variable Objective evidence Concept
• CONVENTIONS:
• --Disclosure/ Materiality/
Consistency/conservatism
BUSINESS ENTITY
CONCEPT
• For accounting purposes the Business
enterprise and the Owner are two separate
entities
• Can easily applied in case of limited liability
company because it is alegal entity
• Togh to apply for partnership // Sole trader/ one
man business
• Enabled the development of responsibility
accounting
CONTD

• Without these no business can be started or


run eg Building, plant & machinery, cash at
hand
• CAPITAL –Where these assets come from ?
When the proprietor invests money in the
business then the transaction gives rise to 2
effects –Assets of business increase and claim
of proprietor on assets of business is
recognized. _____DUAL CONCEPT
• CAPITAL =ASSETS
THE MONETARY CONCEPT

• All business transactions must be in the


currency of the country
• Money is common unit of recording
transactions relating to assets / Liabilities/
capital
• Limitation –Purchasing power ignores inflation
& doesnot take in account quality of
management
Contd --

• Creditors – in case the capital is contributed by


the proprietor is insufficient , business takes to
borrowing from other parties.
• Loan given by outside parties -------Increases
the cash (Asset),credit facilitygranted by
suppliers increases the goods-in – trade of the
business
• CAPITAL +LIABILITIES
=ASSETS===ACCOUNTING EQUATION
• DOUBLE ENTRY SYSTEM
GOING CONCERN
CONCEPT
• -unless and until it has entered into a state of
liquidation, it will be viewed as to have an
indefinite life.
• A. accountant of the business does not make
unnecessary assumption regarding the forced
sale value of goods and assets
• B.assets are depreciated on the basis of
expected life rather than on the basis of market
value.
• FUNDAMENTAL ACCOUNTING PRINCIPLE
ACCOUNTING PERIOD
CONCEPT :

-Strictly speaking – net income can be measured


by comparing assets of the business existing
at the time of its commencement with those
existing at the time of liquidation
-The Balance sheet & P/Laccounts should be
prepared at regular intervals which is one year
beginning on a specific date and ending 12
months later.
MONEY MEASUREMENT
CONCEPT

-accounting every worth of recording event,


happening or transaction is recorded in terms
of money.
-concept increases the understanding of the state
of affairs of the business
---Limitation ---subsequent changes in the money
value are conveniently ignored
COST CONCEPT

• -a. Asset is recorded at the price paid to


acquire it ---I.e. At cost
• B-This cost is the basis for all subsequent
accounting for the asset
• When asset is recorded at cost price ,the
change in the real worth of the asset with the
passage of time is ordinarily recorded in the
accounts books.
• The fixed assts are recorded in the books of
accounts at a price paid for them
• The cost is the amount or money spent in
purchasing the asset, amount spent in installing
and all expenses paid in making the asset
ready for use.
• Record Fixed assets at historical costs as
Market value costly
PERIODIC MATCHING OF
COST AND REVENUE
CONCEPT

• A. revenue realisation-Determination of period


in which the revenue will be realised is the main
concern---Cash basis//sales basis//production
basis
• B. Matching Costs-In determining net income
from the business organisation al costs which
are applicable to the revenue of the period
should be charged against that revenue.
ACCOUNTING
CONVENTIONS

• 1.Convention of Disclosure
• 2.Convention of Materiality
• 3.convention of Consistency
• 4. Convention of Conservatism
FULL DISCLOSURE

• Full, adequate, Fair accounting information


• Every financial statement should fully disclose
all relevant information that affects the average
investor
• Honest reportings, summary of the accounting
policies followed by Financial statements is
appended.
MATERIALITY

An item is to be considered as material


(significant} if the knowledge of that item
could affect the users of the financial
statements in taking some decisions
such as to invest or not to invest in the
enterprise or to give loan or not
CONSISTENCY

• Same accounting methods will be used for


similar items overtime.
• I.Vertical Consistency –within an inter-related
group of financial statements bearing the same
date
• Ii. Horizontal consistency –found between
financial statements from period to period thus
enabling comparison of performance of `one
entity with another.
CONSERVATISM
(PRUDENCE)

• Anticipate no gains but provide for all


losses and if in doubt write them off.
• Thus accountant should record not only
actual losses but also those losses that
are likely to occur., Provision for bad
debts, premium on redemption of
debentures etc.
Other forms of relationship

• CAPITAL +LIABILITIES =ASSETS


• NET WORTH =ASSETS-LIABILITIES
• II.OWNERS EQUITY =TOTAL EQUITY –
EQUITY OF THE CREDITORS
• TOTAL EQUITY = TOTAL ASSETS
• OWNER EQUITY = TOTAL
EQUITY+REVENUE-EXPENSE – EQUITY OF
THE CREDITORS
Nature Of Accounts & Rules
ANY CAPITAL
ACCOUNT
• RULESA/cs Dr Cr
Having RECORD RECORD
DECREASE INCREASE
Same
Rule
ANY LIABILITY
ACCOUNT
RECORD RECORD
DECREASE INCREASE
REVENUE Cr-
• FOR ASSETS ACCOUNTS
• -Dr – means Increase
• Cr—Means Decrease
• FOR EXPENSE ACCOUNT
• Dr –Means Increase
• Cr-Means Decrease
RULES

Dr Cr
• PERSONAL -- The receiver The Giver
• REAL -- What comes in What goes out
• Nominal-- All Losses & All Gains &
Expenses Incomes