Accounting concepts and conventions

Accounting concepts are basic accounting assumptions and ideas which are universally followed by all entities.

Accounting conventions are traditions which are not required to followed universally.

Following are the accounting concepts and accounting convention:-

1. Separate entity concept 2. Money measurement concept 3. Periodicity concept

4. Accrual concept 5. Matching concept 6.Going concept

7. Cost concept 8. Realisation concept 9. Duel concept

10. Conservatism concept 11. Materiality 12. Full disclosure

13. Full disclosure

1. Separate entity concept:

Meaning: According to this concept business and proprietor are two different entity.

Significant : following are main effects of this accounting concept

1. Books of accounts are maintain on firm’s name

2. Only firm’s transaction are recorded in firms books

3. Proprietor is treated as third party and capital is treated as liabilities of business

4. Business will remain continuo even after the death of proprietor.

Note: but for legal point of view business n proprietor are same entity.

2. Money Measurement concept

Meaning : According to this concept only monetary transaction(which can be measure in money) are recoded in
books of accounts

Significant : following are main effects of this accounting concept

1. Employee’s efficiency is not recorded as an asset in books

2. Management efficiency is not recorded as an asset in books

3. Customer’s loyalty is not recorded as an asset in books.

4. Effect of transfer of a manager from one place to another place.

3. Periodicity concept
Meaning : According to this concept life of business is divided in small period time so that we can find out
profit & loss and analysis on financial position.

Significant : Accounting period 12 month period

4. Accrual concept
Meaning : All income and expense should be recorded on due basis and not on cash basis.

Significant :

1. Outstanding Expenses

2. Prepaid expenses

3. Unearned income

4. Accrued income

5. credit sale and credit purchase

5. Matching concept
Meaning : According to this concept, Expenses for the period should be matched against the revenue of the
period.

Profit = Revenue for the period – Expenses for the period

Significant : following are main effects of this accounting concept

1. Depreciation on fixed assets

2. Intangible assets are to be written off

3. Deferred revenue expenses to be written off

6. Going concept
Meaning : The going concern principle is the assumption that an entity will remain in business for the
foreseeable future.

Significant : following are main effects of this accounting concept

1. Bifurcation of expense between capital and revenue

2. Bifurcation of Assets between fixed assets and current assets

3. Bifurcation of Liabilities between long term liabilities.

7. Cost concept
The cost principle requires one to initially record an asset, liability, or equity investment at its original
acquisition cost. The principle is widely used to record transactions, partially because it is easiest to use the
original purchase price as objective and verifiable evidence of value.

8. Realisation concept
According to realisation concept an assets should not be recorded at realizable value until it realizes (if relisable
value is more than cost) but if relisable value of assest is less than cost than assets can ne record at relisable
value (due to conservatism concept).

According to this concept profit should not be distribute as dividend untit it realizes.

9. Duel concept
Double entry accounting system is based on the duality principle and was devised to account for all aspects of a
transaction. Under the system, aspects of transactions are classified under two main types:
Debit
Credit
Debit is the portion of transaction that accounts for the increase in assets and expenses, and the decrease in
liabilities, equity and income.
Credit is the portion of transaction that accounts for the increase in income, liabilities and equity, and the
decrease in assets and expenses.
The classification of debit and credit effects is structured in such a way that for each debit there is a
corresponding credit and vice versa. Hence, every transaction will have 'dual' effects (i.e. debit effects and
credit effects).
The application of duality principle therefore ensures that all aspects of a transaction are accounted for in the
financial statements.
Assets = Capital + Liabilities

10. Conservatism concept

Meaning: The convention of conservatism, also known as the doctrine of prudence in accounting is a policy
of anticipating possible future losses but not future gains. This policy tends to understate rather than overstate
net assets and net income, and therefore lead companies to "play safe".[1]

In accounting, it states that when choosing between two solutions, the one that will be least likely to overstate
assets and income should be selected.

According to this concept "convention expected losses are losses but expected gains are not gains".

. Significant : following are main effects of this accounting concept

1. Valuation of closing stock at cost or net relisable value whichever is less

2. Valuation of Investment at cost or ,market value whichever is less

3. Creation of Provision for Bad debts.

4. Creation of Provision for discount on debtors.

 11. Materiality
Meaning : The materiality concept is the principle in accounting that trivial matters are to be disregarded, and
all important matters are to be disclosed. Items that are large enough to matter are material items.

materiality concept states that financial information is material to the financial statements if it would change
the opinion or view of a reasonable person. In other words, all important financial information that would sway
the opinion of a financial statement user should be included in the financial statements.

The concept of materiality is relative in size and importance. Some financial information might be material to
one company but might be immaterial to another

Significant : following are main effects of this accounting concept

1. Sundry expenses

2. Sundry income

3. Sundry debtors and creditors

4. calculator and office file is not recorded as assets (due to small or immaterial amount)

5. Round off paisa in nearest rupees

12. Full disclosure

Meaning : The full disclosure principle states that you should include in an entity's financial statements all
information that would affect a reader's understanding of those statements.

Full disclosure principle is relevant to materiality concept. It requires that all material information has to be
disclosed in the financial statements either on the face of the financial statements or in the notes to the financial
statements.

Significant : Several examples of full disclosure are:

1. Details of contingent liabilities, contingent assets, legal proceedings, etc. are also relevant to the decision
making of users and hence need to be disclosed.
2. The nature and justification of a change in accounting principle
3. The nature of a non-monetary transaction
4. The nature of a relationship with a related party with which the business has significant transaction volume
5. The amount of material losses caused by the lower of cost or market rule
6. A description of any asset retirement obligations
7. Details of property, plant and equipment cannot be presented on the face of the balance sheet, but a detailed
schedule outlining movement in cost and accumulated depreciation should be presented in the notes.

You can include this information in a variety of places in the financial statements, such as within the line item
descriptions in the income statement or balance sheet, or in the accompanying disclosures.
The full disclosure concept is not usually followed for internally-generated financial statements, where
management may only want to read the "bare bones" financial statements.
 13. Consistency
The consistency principle states that, once you adopt an accounting principle or method, continue to follow it
consistently in future accounting periods

Consistency concept is important because of the need for comparability, that is, it enables investors and other
users of financial statements to easily and correctly compare the financial statements of a company.

Important points:

1. following three concepts are valuation concepts

a. going concept

b. cost concept

c. realization concept

2. following three concepts work together to find correct profit

a. Accural

b. Maching

c. periodity

3. following are three fundamental accounting assumptions

1. going concern

2. accrual

3. consistency