DEFINITION OF ACCOUNTING

American Institute of Certified Public

Accountants (AICPA) defines accounting as:
the art of recording, classifying, and
summarizing in a significant manner and in
terms of money, transactions and events which
are, in part at least of financial character, and
interpreting the results thereof.
MEANING OF GAAP
•Generally Accepted Accounting principles
•Principles of accounting are the general law or rule
adopted or proposed as a guide to action.
•The common set of accounting principles, standards
and procedures.
•These provide a fair financial image of the company.
 ACCOUNTING
PRINCIPLES

ACCOUNTING ACCOUNTING
CONVENTIONS CONCEPTS
Accounting Conventions:
Accounting conventions are the outcome of accounting
practices or principles being followed by the enterprise.
1. Convention of Materiality
2. Convention of Consistency
3. Convention of Conservatism
4. Convention of Full Disclosure
Convention of Materiality: In this only those transactions,
important facts and items are shown which are useful and material
for the business. The firm need not record immaterial and
insignificant Items.
E.g.: Company XYZ Ltd. Bought 6 months supplies of stationery
worth $600. This amount is so small or immaterial, it can be
expensed off in a next month instead of expensing it in the next
6th month.

Convention of Consistency: Accounting method and policies

remain same from one period to another. Circumstance changes
become necessary so the change should be stated clearly
Convention of Conservatism:
•Losses are recorded when the are expected to occur.
•Gains are only recognized once they are certain to happen.
•E.g.: A business owns inventory that was bought for $12000. it has
gone down in value and is now worth just $8000

Convention of Full Disclosure: Financial statements and their

notes should present all information that is relevant and material
to the users understanding of the statement.
Accounting Concepts:
1. Business Entity Concept
2. Going Concern Concept
3. Money Measurement Concept
4. Cost Concept/Historical Cost Concept
5. Accounting Period Concept
6. Dual Aspect / Duality Concept
7. Matching Concept
8. Revenue Recognition Concept.
1. Accounting Entity or Business Entity Concept:
• The business is treated as a unit or entity separate from its owners.
• Amount invested by proprietor is shown as liability.
• Amount paid for personal expenses of proprietor are shown as
drawings from capital of proprietor.

2. Going Concern Concept:

• Business concern will continue for an indefinite period.
• Enterprise will not cease doing business; it will not sell off its
assets nor look for liquidation.
3. Money measurement Concept: Only those transactions are
recorded which can be expressed in monetary terms.
E.g.: an efficient dedicated manager is definitely an asset to the
business, but since the monetary measurement is not possible so it
is not shown in books

4. Cost concept or Historical Cost Concept :

• Fixed assets are recorded at cost price and are systematically
reduced by the process called depreciation.
• These assets will disappear from balance sheet at the end of their
economic life when they have been fully depreciated and sold as
scrap.
5. Accounting Period Concept:
• It is necessary to know at frequent intervals “how things are
going”.
• Twelve month period is usually adopted for this purpose. This
time period is called Accounting Period.

6. Dual Aspect Concept: Under this concept for every debit, there
is a credit. Briefly the dual aspect concept can be expressed as
under: Capital + Liabilities = Assets
7. Matching Concept:
•Profit is most important factor for the proprietor to keep the
business activities.
•Revenue and their related expense in the same accounting period
Purpose of matching concept is to avoid misstating earning for a
period.

8. Revenue recognition Concept:

•Revenue is considered earned on the day.
•Transfer goods to customer in exchange of valuable consideration.
•This is of great importance in stopping business from inflating their
profit.