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
Money measurement concept
Going concern 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
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: