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ACCOUNTING CONCEPTS

                                                                             ACCOUNTING ASSUMPTIONS 

                     AND  CONCEPTS

                                             CHAPTER 3






ACCOUNTING CONCEPTS

Accounting is a business language used to communicate the financial information of the business to the people concerned. This make it important for accounting to be based on certain concepts. These concepts imply the necessary assumptions or conditions upon which accounting is based


BUSINESS ENTITY CONCEPT

According to this concept, a business is a separate entity from its owner. Business transactions are recorded from the point of view of the business entity and not the owner. Legally business and owner are treated as same but for the purpose of accounting treatment both are considered separate. Owner invested capital. In business and can claim for it so he is treated as creditor of business and business is treated as debtor. That’s why capital is always treated as liability of business.


MONEY MEASUREMENT ASSUMPTION

In accounting everything in recorded in terms of money. Events or transactions which cannot be expressed in terms of money are not recorded in the books of accounts, even if they are very important or useful for the business. Purchase and sale of goods, payments of expenses and receipt of income and receipt of income are monetary transactions which find place in accounting.


GOING CONCERN ASSUMPTION

The following points show the significance of going concern assumptions when business is started it is assumed that business will exist for indefinite period. Business is judge for its capacity to earn profits in future on based of this assumption. Assets and liabilities are classified into short term and long term nature on the basis. Income and expenses are classified in revenue nature and capital nature on this basis.
                                            

PERIODICITY ASSUMPTION

Under the going concern assumption it is assumed that a business entity has a reasonable expectation of continuing its business or an indefinitely period of time. Actual profit of business can be calculate at the time of the closure or liquidation of business by taking the difference between the capital introduced and capital remaining. But a businessman does not have patients to wait till liquidation to know his profit and even there is no use of such calculation of profit because after closure of business no steps could be taken for rectification in case of loss. According to this assumption, so the life of business is broken into small repetitive period to find profits or loss. Generally, this interval is taken as 12 months. Thus at the interval of 12 months, the businessmen measures his income and studies the financial position of his business. If the gap or interval is very big then it would not help in taking timely corrective steps.



ACCRUAL CONCEPT

The meaning of accrual is something that become due yet to be paid or received at the end of the accounting period in terms of money. According to this concept, revenue is realized at the time of sale of goods or services irrespective of when cash is received and expenses are recognized at the time of services and utilized in the generation of revenue irrespective of the payment made. For example: order for goods is received on 1 April, 2015 for delivery making on 15 April and payment received on 30 April. Income is recognized on 15 April, 2015.



MATCHING CONCEPT

According to matching concept, we compare the expenses with the revenues for an accounting period in order to determine the net profit or loss of a business of the period. If revenue exceed expense, it is called profit or income and in case expense exceeds revenue, it become loss. According to this concept expenses and income of one accounting period are adjusted in the expenses and income of the same accounting period. If any expense or income of previous year or next year are there they should be reduced from related account because a per accrual concept they were already in the belonging year.



DUAL ASPECT CONCEPT

This concept indicates that each transaction has two aspects and is recording in two difference accounts. Example, if a business house purchase machine on cash basis, the machine account and the cash account will be affected.
The double-entry system of accounting is based on this concept. The basis presumption of this system is that every business transaction has to aspects. Under this system, both the aspects of a transaction are recognize and recording.



ACCOUNTING PERIOD CONCEPT

The time period for which final accounts business are maintained is called the accounting period. The life of business is indefinitely long period which is divided into shorter periods for summarizing accounting information and for effective control. Accounts for a business are prepared for a specific period, generally a 12-month period. In India, the accounting period  is generally, taken for april 1 to 31 march.



OBJECTIVE VERIFIABLE CONCEPT

According to this concept every transaction which is recording in book of accounts must have proof in written or printed. Any transaction recorded without any proof is considered as fraud.





ACCOUNTING CONVENTION

            Defining accounting conventions

Conventions are the customs and traditions that act as a guideline for the preparation of the final account. Following these conventions results in the presentation of clear and meaningful final accounts.
The conventions followed to prepare accounting statements are:
·         Convention of consistency
·         Convention of conservatism
·         Materiality convention



CONVENTION OF CONSISTENCY

According to the convention of consistency the accounting practices and methods should not be changed from one accounting period to another. For example, there are 2 methods to charge depreciation, written down value method and straight line method. The methods once chosen should be used consistently year after year. Consistency in accounting practices and methods makes the records of the company for difference years comparable.




CONVENTION CONSERVATISM

According to this convention the accounting records should present a realistic picture of the state of affairs of the business. All the prospective loss should be accounted for and all prospective gains should be ignored.



MATERIALITY CONVENTION
According to this convention, all relatively relevant items, the knowledge of which might influence the decision of the user of the financial statements, should be disclosed in the financial statement. 

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