Amity Business School

Amity Business School

MBA Class of 2013, Semester I ACCOUNTING FOR MANAGEMENT
Course Code: MBAFN10101

Lecture 2

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Generally Accepted Accounting Principles Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).
Relevant Information Affects the decision of its users.

Reliable Information

Is trusted by users.
Is helpful in contrasting organizations.

Comparable Information

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Accounting is based on a set of principles on which there is general agreement, not on rules that can be proved.

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Accounting Principles

Accounting Concepts

Accounting Conventions

Concept includes those basic assumptions or Conditions upon which the science of Accounting is based

Conventions includes those customs or traditions Which guide the accountant while preparing Accounting statements

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Basic Accounting Concepts

Business Entity Concept
Money Measurement Concept
Going concern Concept

Accounting Period Concept

Matching Concept Revenue Recognition Concept Dual Aspect Concept

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Separate Entity Concept

The activities of the entity are to be kept separate and distinct from the activities of the owner and all other economic entities.

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MONEY MEASUREMENT ASSUMPTION

Only transaction data that can be expressed in terms of money be included in the accounting records.

Hiring an employee
Do not record

Paying an employee Record

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GOING CONCERN ASSUMPTION

The enterprise will continue in operation long enough to carry out its existing objectives.

NOW

FUTURE

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Accounting Period Assumption

The economic life of a business can be divided into artificial time periods
2008
QTR 1 QTR 2 QTR 3 QTR 4 JAN APR JUL OCT

2009
FEB MAY AUG NOV MAR JUN SEPT DEC

2010

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MATCHING CONCEPT

Expenses are matched with revenues in the period in which efforts are made to generate revenues.

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REVENUE RECOGNITION CONCEPT

Revenue should be recognized in the accounting period in which it is earned. When a sale is involved, revenue is recognized at the point of sale.

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Dual Aspect Concept

This is one of the fundamental concept of Accounting. It may be stated as for every Debit there is a credit. Every business transaction has a dual effect and the entry Made for the transaction is recorded on the debit and as well as on the credit side It may be expressed in the form of equation

Assets = Liabilities + Equity

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ACCOUNTING CONVENTIONS

CONSERVATISM CONSISTENCY
FULL DISCLOSURE MATERIALITY

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CONSERVATISM
According to this convention, the Accountants should follow the Rule Anticipate no profits but provide for all probable losses. The convention requires That PROFIT should neither be overstated nor anticipated

When in doubt, choose method least likely to overstate assets and income Do not intentionally understate!

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CONSISTENCY
CONSISTENT INFORMATION
Companies should use the same accounting principles from year to year. Changes in accounting principles must be justifiable.
2000 2001

2002

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FULL DISCLOUSRE
It requires that the financial statements should reveal all the relevant and reliable Information fully & fairly. This convention become more relevant in the companies Form of organization where management & ownership are in separate hands
Section 211 of the companies Act 1956 requires that the Income statement & Balance Sheet of a company must give true & fair value of statement of affairs of the Company& also prescribe the forms in which these statements are to be prepared

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Materiality
Will it influence the decision? MATERIAL No impact on decision? IMMATERIAL
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