Accounting Concepts and Conventions

Accounting Concepts and Conventions : 

Accounting Concepts and Conventions

Introduction : 

Accounting principles are man-made. These are based upon the logical and practical experience of day-to-day accounting process. A general law or rule adopted as a guide to action Introduction

Accounting Concepts : 

Business entity concept Reliability concept Money measurement concept Going concern concept Cost concept Accrual concept Accounting period concept and Realization concept Accounting Concepts

Business Entity Concept : 

The business and its owner(s) are two separate existence entity Any private and personal incomes and expenses of the owner(s) should not be treated as the incomes and expenses of the business Business Entity Concept

Examples : 

Insurance premiums for the owner’s house should be excluded from the expense of the business The owner’s property should not be included in the account of the business Any payments for the owner’s personal expenses by the business will be treated as drawings and reduce the owner’s capital contribution in the business Examples

Reliability Concept : 

It is a quality of information that assures decision makers that the information captures the conditions or events it maintains to represent Reliable data require convincing evidence that can be verified by independent auditors Reliability Concept

Money Measurement Concept : 

An Accounting record is made only of information which that can be expressed in monetary terms. All transactions of the business are recorded in terms of money Market conditions, technological changes and the efficiency of management would not be disclosed in the accounts Money Measurement Concept

Going Concern Concept : 

The business will continue in operational existence for the foreseeable future Financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise Going Concern Concept

Examples : 

Possible losses form the closure of business will not be anticipated in the accounts Prepayments, depreciation provisions may be carried forward in the expectation of proper matching against the revenues of future periods Fixed assets are recorded at historical cost Examples

Cost Concept : 

Assets should be shown on the balance sheet at the cost of purchase instead of current value Example- The cost of fixed assets is recorded at the date of acquisition cost. The acquisition cost includes all expenditure made to prepare the asset for its intended use. It included the invoice price of the assets, freight charges, insurance or installation costs Cost Concept

Accrual Concept : 

The recording of the financial transaction is made when the transaction takes place itself and not when the cash for the transaction is received, as in cash concept The cash is received after a period of time but the transaction is already noted in the books of transaction Accrual Concept

Accounting Period Concept : 

Monitor the performance of the organization periodically One accounting period will be considered Calculating accounts for more than one accounting period will be tedious Accounting Period Concept

Realization Concept : 

Revenues should be recognized when the major economic activities have been completed Sales are recognized when the goods are sold and delivered to customers or services are rendered Realization Concept

To conclude: : 

Accounting concepts will help process the information effectively at low cost. It helps to obtain reports quickly. It helps in proper planning and decision making. we can know employees performance towards promoting sales. To conclude: