ACCOUNTING CONCEPTS, PRINCIPLES

AND CONVENTIONS
This generally accepted set of rules provides unity of understanding and unity of
approach in the practice of accounting and also in better preparation and
presentation of the financial statements.

To avoid confusion and to achieve uniformity, accounting process is applied within

the conceptual framework of ‘Generally Accepted Accounting Principles’
(GAAPs).

These principles are the ground rules, which define the parameters and constraints
within which accounting reports are generated. Accounting principles are basic
norms and assumptions on which the whole accounting system has been developed
and established.
ACCOUNTING CONCEPTS

Accounting concepts define the assumptions on the basis of which financial

statements of a business entity are prepared.

ACCOUNTING CONVENTIONS

Accounting conventions emerge out of accounting practices. The accountancy

bodies of the world may change any of the convention to improve the quality of
accounting information. Accounting conventions need not have universal
application.

CONCEPTS, PRINCIPLES AND CONVENTIONS - AN OVERVIEW

(a) Entity concept: Entity concept states that business enterprise is a separate
identity apart from its owner. Accountants should treat a business as distinct from
its owner. Business transactions are recorded in the business books of accounts and
owner’s transactions in his personal books of accounts.
 This basic concept is applied to all the organizations whether sole
proprietorship or partnership or corporate entities.

Entity concept means that the enterprise is liable to the owner for capital
investment made by the owner. Since the owner invested capital, which is also
called risk capital, he has claim on the profit of the enterprise.

The accounting equation (i.e. Assets = Liabilities + Capital) is an

expression of the entity concept because it shows that the business itself owns the
assets and in turn owes to the various claimants.

Owner’s transactions with the business, (e.g., capital provided to the

business, goods and amount withdrawn from the business for the personal use of
the sole trader and the partners of the firm, income tax or life insurance premium
paid from the business on the taxable income or life of the proprietor etc.) are
recorded so that true financial position and profitability of the business may be
disclosed.

In the eyes of law business and non-business assets and liabilities are
treated alike in case of a sole proprietor.
 Similarly, In case of a partnership firm, business assets of the firm are used
first for paying business liabilities of the firm and if a surplus remains after
paying the firm's liabilities, a partner can use his share of the surplus for the
payment of his private liabilities.
In the same way, private assets of the individual partners are first utilised for the
payment of their individual private liabilities and if there is a surplus in any
partner’s private estate, it shall be treated as part of partnership property and can
be utilised for the payment of firm's liabilities.

In case of joint stock companies, there is a legal distinction between the

owners (i.e. shareholders) and the business.