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Session 4

Financial & Management Accounting

Topic to be covered in this session:

 Certain accounting principles; and

 Certain accounting conventions

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Session Learning Objectives

At the end of this session you will be able to understand:

 Verifiable Objective Evidence Concept

 Historical Cost Concept
 Accounting Equation Concept
 Materiality Concept
 Consistency Concept
 Conservatism Concept
 Timeliness Concept
 Industry Practice Concept

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Basic Principles

 Verifiable Objective Evidence Concept

 Historical Cost Concept
 Accounting Equation Concept

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Modifying Principles
 Materiality Concept
 Consistency Concept
 Conservatism Concept
 Timeliness Concept
 Industry Practice Concept

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Verifiable Objective Evidence Concept:

 Transactions must be recorded only on the
basis of documentary evidence so that it may be
verified even after the transaction has taken place

Note: The documentary evidences are vouchers which

are usually of the following types:
 Receipt Vouchers
 Payment Vouchers
 Transfer Vouchers / Journal Vouchers
 Supporting Vouchers

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Historical Cost Concept:

 Transactions are recorded at historical cost i.e.
the actual cash outflow and / or liability
incurred in the matter

Note: However this concept may result in misleading

information regarding impairment and upward
revaluation of assets. There are specific Accounting
Standards to deal with such situations

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Accounting Equation Concept:

 This concept is an extension of the Dual Concept
 A business can acquire benefits exactly to the
extent which has been provided to it by the
owner(s) and other external entities
Equity + Other Liabilities = Assets
Equity + Profit + Other Liabilities = Assets
Equity + (Revenue – Expenses) + Other Liabilities =
Assets
Equity + Revenue + Other Liabilities = Assets +
Expenses
Total Credit = Total Debit
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Modifying Principles (Conventions)

Materiality Concept:

 This is a modification of the concept of Full

Disclosure concept.

 Only material facts need to be disclosed

 Material facts are those facts the knowledge of which

might impact the decision of a logical user of financial
reports

 Amounts which are computed as per any statute are

material facts
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Consistency Concept:

 Once an organization decides to adopt a

particular method of revenue or expense
recognition in line with the other concepts, the
same should be consistently applied year after
year, unless there is a valid reason for change in
the method

 Lack of consistency would result in the

financial information becoming non-comparable
between the different accounting periods.

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Conservatism Concept (Concept of Prudence):

 The basic intention is to have an estimate of

reported profits which actually may get better
but not worse

 Revenue is to be recognized only on adequate

surety but expenses are accounted for even on a
logical anticipation

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Timeliness Concept:

 Transactions should be recorded immediately

without any delay

 Transactions should be accounted for strictly

on a chronological basis

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Industry Practice Concept:

 Each industry has its own characteristics and
features
 The accounting concepts are thus applied on
certain industries i.e.
 Electricity generation & distribution companies
 Insurance Companies
 Banking Companies
 Non-Profit organizations
on a modified manner to suit the industry
requirements

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Crib Sheet

 Basic Principles
 Verifiable Objective Evidence Concept
 Historical Cost Concept
 Balance Sheet Equation Concept

 Modifying Principles
 Materiality Concept
 Consistency Concept
 Conservatism Concept
 Timeliness Concept
 Industry Practice Concept

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THANK YOU…

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