CONCEPTS AND CONVENTIONS OF ACCOUNTING

Definition of Accounting: Accounting is the art of recording, classifying and summarizing events or transactions in terms of money and interpreting the results thereof. Type of Accounts: 1. Nominal Account: !. eal Account: Dr. All Expenses and Losses Cr. All Income and ains Dr. "hat Comes in Cr. "hat oes #ut Dr. %he &eceiver Cr. %he iver

$. Pe!sonal Account:

ACCOUNTING CONCEPTS:
Definition: Accounting concepts are fundamental thoughts or ideas that underlines or give guidelines to the theory and practices of Accounting. Diffe!ent Concepts of Accounting:

1. "oney "easu!ement Concept: %his concept means in accounting a

record is made only of those events or transactions 'hich can (e measured or expressed in terms of money. )on monetary events 'hich cannot (e measured and expressed in monetary terms are ignored. Eg: &etirement of managing director, *uality of the goods and services of the organization.

!. Sepa!ate Entity o! #usiness Entity Concept: %his concept means that

a (usiness underta+ing or unit is treated or regarded as different and distinct from its o'ners or contri(utors. ,ence under the eyes of la', the o'ners and the (usiness are t'o separate entities. "ho are capa(le of entering into transactions 'ith each other. %he (oo+s of accounts sho' only those transactions 'hich are in the nature of (usiness.

$. Going Conce!n Concept $ Continuity Concept: %his concept means

that a (usiness 'ill continue to exist and carry on its (usiness operations for an indefinite period in the future.

It implies that an organization has no intention of 'inding up in the future. %he assumption is that the fixed assets are not for the purpose of resale.
-. Cost$%isto!ical Cost Concept: %his concept implies that the fixed assets
are to (e recorded at the price at 'hich it 'as ac*uired i.e., cost price. %he mar+et values of such fixed assets are ignored. %his concept is (ased on the principle of o(.ectivity and it prevents giving of an ar(itrary value to any fixed asset.

/. Dual Aspect $ E&uation $ Accounting E&uation Concept: %his

concept emphasizes that every (usiness transaction al'ays result in the receiving of some value and the giving of some other (enefit of e*ual value i.e., ! aspects of a transaction. %his is also +no'n as dou(le aspect of accounting. 0or eg12 "hen a (usiness purchases goods for cash. It receipts goods of some value and imports cash of the e*ual value.

3. Accounting Pe!io' Concept: %his concept means that for measuring the
financial results of a (usiness periodically the (usiness life of a concern is divided into convenient short periods of time called accounting periods. %he profit or loss and the financial position is ascertained at the end of the accounting period (y preparing the financial statement. %he accounting period is generally one year. It may (e Calendar year 1st 4an to $1st Dec. or financial year 1st April to $1st 5arch.

6.

ealisation Concept: %his concept emphasis that profit should (e

considered only 'hen it is realized. According to sale of goods act revenue is earned only 'hen the goods are transferred. 7rofit is deemed to have accrued, 'hen the property in good passes to the (uyer i.e., 'hen sales are affected and the customer (ecomes lia(le to pay.

8. Acc!ual Concept: %his concept implies that 'hen an event or transaction is

entered into its conse*uences 'ill certainly follo's for instance, A9C company (orro's loan of &s. 1:,::: at 1!; 7.A. from <9I on 1st April !::!. %he conse*uence of this transaction is that he 'ill have to pay an interest of &s. 1,!:,::: at the end of the year i.e., Interest (ecomes paya(le. %his concept is concerned 'ith the expected future cash receipts and payments. Eg12 "ages, <alaries, &ent, Interest, etc.

=. O()ecti*e E*i'ence Concept: %his concept means that all the accounting
entries should (e evidenced and supported (y source documents such as invoices, vouchers, etc. %his leads to no (ias or fraud and the accounts as 'ell as the source documents must (e su(.ect to certification (y Auditors.

1:. "atc+ing Concept: 7rofit is the result of ! factors i.e., 1> &evenue !>
Expenses. %his concept states that only expenses and revenues occurring in respect to a particular financial year is ta+en into account for that particular period. %his concept re*uires the proper recognition and allocation of revenues and expenses.

Con*entions of Accounting
1. Con*ention of Conse!*atism: %his convention is an convention of caution
or prudence or the policy of playing sale. %his convention implies that in the accounting records and the financial statements of a (usiness the prospective losses, ris+ and uncertainties should (e ta+en note of and provided for, (ut prospective profits should (e ignored ?provide for all possi(le losses (ut anticipate no profits@. Eg:, Closing stoc+ is valued at cost price or mar+et value 'hich ever is lo'er. &eserve for (ad de(ts, provision for discount, provision for tax, etc. are made. %he nationals (ehind this convention is that the future is uncertain.

!. Con*ention of Consistency: %his convention that the accounting practices

and methods should (e consistent from one accounting year to another. 0or instance, the depreciation method valuation of stoc+ and the treatment of deafened revenue expenditure. %he idea (ehind this convention is that there 'ill (e no difficulty in comparing the financial statements year after year. It 'ill also ena(le that the financial records to sho' a true picture.

$. Con*ention of Full Disclosu!e: %his convention means that the material

facts must (e disclosed, in the financial statement 'ith sufficient details. 0or instance, Investments not only the various securities held (y the concern, (ut also the more of valuation should (e disclosed. 0ixed Assets A should disclose the cost of ac*uisition, the depreciation method and the amount of depreciation 'ritten of to date. Contingent lia(ilities of the (usiness organization should also (e disclosed in the financial report.