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conventions and
principles
Meaning of generally accepted
accounting principles
4
GAAP
Accounting
Principles
Convention
Concepts
s
Accounting Concepts
Concept
These are the assumptions on the basis of
which financial statements are prepared.
Concepts are the idea or thought which has
universal application.
Conventions
These are derived by usage and practice.
conventions need not have universal
application.
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Concepts
1. Business Entity Concept:
o Business considered to be distinct from its owners-proprietors,
partners or members.
not owners.
5. Cost concept:
o Asset is ordinarily recorded in the books at the price at which it was acquired i.e.
at its cost price.
o Though recorded in the books at cost, in the course of time, they become reduced
in value on account of depreciation charges.
o Known as historical cost concept.
o Assets do not reflect the real worth i.e. Price level changes
8. Matching Concept:
o Expenses should be matched to the revenue of
the appropriate accounting period.
o For Example- Salary paid in January 2011
relating to December 2010 should be treated as
expenditure for the year 2010 and not 2011.
9. Accrual Concept:
o Accrual is concerned with expected future cash
receipts and payments.
o Make record of all expenses and incomes relating to
accounting period whether actual cash has been
disbursed or received or not.
o For e.g. purchases and sales of goods on credit, rent
(not yet paid), salaries outstanding etc.
4. Convention of materiality:
o Only significant transactions recorded.
o Insignificant transactions should find no place in the
books of accounts.
Accounting Equation
Step II
Find out the effect on the transaction.
Step III
Show the effect but ensure that the total of right hand side is equal to left hand
side.