ACCOUNTING

CONCEPTS &
CONVENTIONS
Objective

Appreciate and understand the

assumptions which are made when
recording accounting data.
What are Concepts and Conventions

◻ Rules which govern the way in

which we record financial
transactions.
What’s the difference?
BASIS ACCOUNTING ACCOUNTING
CONCEPTS CONVENTIONS
Established By law Guidelines based
upon customs or
usage
Biasness No space for Biasness in
personal adoption
biasness in the
adoption
Uniformity Uniform No uniform
adoption adoption
Basic Concepts & Conventions
◻ The Business Entity Concept
◻ The Money Measurement Concept
◻ The Going Concern Concept
◻ Accounting Period Convention
◻ Dual Aspect Concept
◻ The Accruals Concept
◻ The Materiality Concept
◻ The Prudence Concept
◻ The Consistency Concept.
The Business Entity Concept

◻ Defines the business as separate from its owner

◻ Records transactions from a business viewpoint

◻ Personal transactions are not recorded in the firm’s

books
Example

◻ If the owner of the business buys a car for his

family with his own money this will not be
recorded in the books of the business
The Money measurement concept

◻ Accounting is concerned ONLY with those

transactions that :

■ Can be measured in money

■ Most people will agree to the money value
of the transaction
Example

◻ Sports and Games recently hired a new Manager

who just completed his Masters in Business
Management. He is very efficient .

◻ How will this be valued?

The Going Concern Concept

❑ Assumes that the life of the business is

indefinite.

❑ The business will continue in the

foreseeable future
Accounting Period Convention
◻ Entire life of the firm is divided into time intervals
in order to prepare the financial statements

◻ Accounting period is of two types-

(1)financial year(1st Apr to 31st March) &
(2) calendar year(1st Jan to 31st Dec).
Example

Just like your birthday!!

You will be one year older ….at what date
The Dual Aspect Concept
◻ Every transaction recorded in books affects at
least two accounts.
◻ If one is debited then the other one is credited
with same amount.
◻ This system of recording is known as “DOUBLE
ENTRY SYSTEM”.
◻ ASSETS = LIABILITIES + CAPITAL
The Accruals Concept
❑ In this concept revenue is recorded when sales are
made or services are rendered whether cash is
received or not.

❑ Determining the expenses used up to obtain the

revenue is referred to as matching expenses
Example
Courts Ltd. sold goods on credit to Ross.
Courts will record the sale despite the fact that no
money was received
Materiality Concept
◻ Items having an insignificant effect to the user
need not to be disclosed.

◻ An item is regarded as material if there is

reason to believe that knowledge of it would
influence the decision of an investor.”
Example

A very large corporation's financial statements have

the dollar amounts rounded to the nearest $1,000.
Its is not necessary to report to the nearest cent since
it is not Material
Prudence Concept
◻ The accountant should always be on the side of
safety, this is known as prudence.
Always choose the option that will understate profit
rather than overstate it

▪ anticipate or disclose losses,

▪ but it do not allow a similar action for gains.
Example
When two values are given for stock
Cost $10 000
Market Value $15000
The lower value should be chosen.
Consistency Concept

◻ The same accounting treatment to similar

transactions from period to period are made.
Example

◻ The same methods of depreciation must be used for

fixed assets throughout all accounting periods
THE END

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