Base Theory of Accounting

Accounting Principles

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 Accounting Principle

These are Principles which helps us in maintaining

Accounting Principle consistency and uniformity in Financial Statements

You ask both to prepare Financial Statements

They may produce different Statements which are not uniform

and Comparable

This will happen if there are no Principles

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 Accounting Principle

Accounting Concepts
Accounting Principle

Other Names Accounting Conventions

Accounting Postulates

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 Accounting Principle

Accounting Concepts
Accounting Principle

Other Names Accounting Conventions

Accounting Postulates

GAAP – Generally Accepted Accounting Principles

 Tools for Consistency and Uniformity

GAAP – Generally Accepted Accounting Principles Accounting Standards

Institute of Chartered Accountants of India

In this chapter we shall be discussing only about GAAP (Accounting Concepts) , Accounting standards shall be discussed
later in the course
 Accounting Concepts/Principles

Entity Concept
Money Measurement Concept
Following are the Accounting Concept that we
shall discuss in this Chapter Periodicity Concept

Revenue Recognition Concept

Accrual Concept

Matching Concept

Going Concern Concept

Cost Concept

Dual aspect concept

Full Disclosure Concept

Objectivity Concept
Consistency

Materiality Concept Conservation Concept

 Entity Concept

Entity concept states that business enterprise is a separate identity apart from its owner

Case 1: When a person brings in some money as capital into his business, in accounting records, it is treated as
liability of the business to the owner

Example: Mr. X started business investing Rs. 7,00,000 with which he purchased machinery for ` 5,00,000 and
maintained the balance in hand. The financial position of the will be as follows:

Liability Assets
Capital By Owner 700000 Cash 200000
Machine 500000

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 Entity Concept

Entity concept states that business enterprise is a separate identity apart from its owner

Case 2: When the owner withdraws any money from the business for his personal expenses(drawings), it is
treated as reduction of the owner’s capital and consequently a reduction in the liabilities of the business

Example: Now if Mr. X spends ` 5,000 to meet his family expenses from the business fund, then it should not be
taken as business expenses and would be charged to his capital account (i.e., his investment would be reduced by
` 5,000).

Liability Assets
Capital By Owner 695000 Cash 195000
Machine 500000

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 Entity Concept

Entity concept states that business enterprise is a separate identity apart from its owner

The personal assets and liabilities of the owner are, therefore, not considered while recording and reporting the
assets and liabilities of the business.

Similarly, personal transactions of the owner are not recorded in the books of the business, unless it involves
inflow or outflow of business funds.

Example: Now if Mr. X spends ` 5,000 to meet his family expenses from his own bank account, then it should not
be taken recorded in the books

Liability Assets
Capital By Owner 695000 Cash 195000
Machine 500000

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 Accounting Concepts

Entity Concept
Money Measurement Concept
Following are the Accounting Concept that we
shall discuss in this Chapter Periodicity Concept

Revenue Recognition Concept

Accrual Concept

Matching Concept

Going Concern Concept

Cost Concept

Dual aspect concept

Full Disclosure Concept

Objectivity Concept
Consistency

Materiality Concept Conservation Concept

 Money Measurement Concept

Only those transactions and happenings in an organization which can be expressed in terms of money shall be recorded
in the Book of Accounts

Example: Sale of goods, Payment of Rent etc.

All such transactions or happenings which can not be expressed in monetary terms do not find a place in the
accounting records of a firm

Example: Appointment of a manager, Capability of Human Resources

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 Money Measurement Concept

All Transactions be recorded in monetary Unit

30 Personal Computers 2 acres of land 30 Chairs and Tables

Expressed in different Units

These need to be expressed in Monetary Units

Computers – 15 lakh Land – 20 crore Chairs and Tables – 3 lakh

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 Accounting Concepts

Entity Concept
Money Measurement Concept
Following are the Accounting Concept that we
shall discuss in this Chapter Periodicity Concept

Revenue Recognition Concept

Accrual Concept

Matching Concept

Going Concern Concept

Cost Concept

Dual aspect concept

Full Disclosure Concept

Objectivity Concept
Consistency

Materiality Concept Conservation Concept

 Accounting Period Concept

Accounting period refers to the span of time at the end of which the financial statements of an enterprise are prepared, to
know whether it has earned profits or incurred losses during that period and what exactly is the position of its assets and
liabilities at the end of that period

The Companies Act 2013 and the Income Tax Act Income statements should be prepared annually

Required to publish quarterly results to ascertain

Listed Companies as per regulations by SEBI the profitability and financial position at the end of
every three months period

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 MCQs

Economic life of an enterprise is split into the periodic interval to measure its performance is as per

(a) Entity
(b) Matching
(c) Periodicity

Ans: Option C

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 Accounting Concepts

Entity Concept
Money Measurement Concept
Following are the Accounting Concept that we
shall discuss in this Chapter Periodicity Concept

Revenue Recognition Concept

Accrual Concept

Matching Concept

Going Concern Concept

Cost Concept

Dual aspect concept

Full Disclosure Concept

Objectivity Concept
Consistency

Materiality Concept Conservation Concept

 Revenue Recognition (Realization Concept)

The concept of revenue recognition requires that the revenue for a business transaction should be included in the
accounting records only when it is realized

Revenue realization means when the right to receive it arises

Example:
Credit sales are treated as revenue on the day
sales are made and not when money is
received from the buyer

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 Revenue Recognition (Realization Concept)

The concept of revenue recognition requires that the revenue for a business transaction should be included in the
accounting records only when it is realized

Revenue realization means when the right to receive it arises

On Rent

Suppose he receives rent for March on 1st April, in which month

revenue will be recorded? March

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 Exceptions - Revenue Recognition (Realization Concept)

Long Term
Contract to build a
Dam

Will the revenue be recognized only when Dam is completed?

Proportionate amount of revenue, based on the part of contract completed by the end of the period is treated
as realized

So if after 1 year , 10% of dam is completed and total revenue is 20 lakh, then 2 lakh will be realized

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 Exceptions - Revenue Recognition (Realization Concept)

Sell item on
Installment

Will all the revenue be recognized when phone is sold through Installment provision?

In case of Installments ,the amount collected in installments is treated as realized.

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 Accounting Concepts

Entity Concept
Money Measurement Concept
Following are the Accounting Concept that we
shall discuss in this Chapter Periodicity Concept

Revenue Recognition Concept

Accrual Concept

Matching Concept

Going Concern Concept

Cost Concept

Dual aspect concept

Full Disclosure Concept

Objectivity Concept
Consistency

Materiality Concept Conservation Concept

 Accrual Concept

Revenues are Recorded Revenue is Realized and not when cash is received

Expense is Recorded Expense is realized and not when cash is paid

Revenue Recognition Concept applies only to Revenues

Accrual Concept applies both to Revenues and Expenses that revenues and Expense are to be recorded when they
occur and not when cash is received or paid

Accrual Concept works in sync with Periodicity Concept

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 Accrual Concept

Example: Mr. J D buys clothing of 50,000 paying cash 20,000 and sells at ` 60,000 of which customers paid only 50,000.

Cost - 50,000
What shall be revenue and Cost recognized as per Accrual Concept?
Revenue - 60,000

Cost will not be 20,000 because it is just the cash paid, so actual cost realized is 50,000

Revenue will not be 60,000 because it is just the cash paid, so actual revenue realized will be 60,0000

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 Accounting Concepts

Entity Concept
Money Measurement Concept
Following are the Accounting Concept that we
shall discuss in this Chapter Periodicity Concept

Revenue Recognition Concept

Accrual Concept

Matching Concept

Going Concern Concept

Cost Concept

Dual aspect concept

Full Disclosure Concept

Objectivity Concept
Consistency

Materiality Concept Conservation Concept

 Matching Concept

It states that expenses incurred in an accounting period should be matched with revenues during that period. It follows
from this that the revenue and expenses incurred to earn these revenues must belong to the same accounting period

Only those costs/expenses shall be considered which have been used to generate revenue

I bough 10 toys at 10 per toy I Sold only 8 toys at 11 per Profit: 88-100 = (-12) (Wrong)
toy

Profit: 88 – 80 = 8

Price of 2 toys which are not sold shall not be considered as cost during this period
 Matching Concept

Works in Sync
with
Matching Concept Accrual Concept Periodicity Concept
 Matching Concept

Mr. P K started cloth business. He purchased 10,000 pcs. garments @ `100 per piece and sold 8,000 pcs.@ 150 per piece
during the accounting period of 12 months 1st January to 31st December 2015. He paid shop rent @ ` 3,000 per month
for 11 months and paid ` 7,00,000 to the suppliers of garments and received ` 10,00,000 from the customers.

Revenues 10,00,000 Revenues 12,00000 Revenues 12,00,000

Cost of 7,00000 Cost of 10,00000 Cost of 8,00000
Garments Garments Garments
Cost of Rent 33000 Cost of Rent 36000 Cost of Rent 36000
Profit 9,67,000 Profit 1,64000 Profit 3,64000

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 MCQs

Mohan purchased goods for 15,00,000 and sold 4/5th of the goods for 18,00,000 and met expenses
amounting 2,50,000 during the year, 2015. He counted net profit as 3,50,000.
Which of the accounting concept was followed by him?
Ans: C
(a) Entity
(b) Periodicity.
(c) Matching.

Revenue from sale of products, is generally, realized in the period in which

(a) Cash is collected.

Ans: B
(b) Sale is made.
(c) Products are manufactured.

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 MCQs

The determination of expenses for an accounting period is based on the principle of

(a) Objectivity Ans: C

(b) Materiality.
(c) Matching.

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 Accounting Concepts

Entity Concept
Money Measurement Concept

Periodicity Concept

Revenue Recognition Concept

Accrual Concept

Matching Concept

Next Video Going Concern Concept

Cost Concept

Dual aspect concept

Full Disclosure Concept

Objectivity Concept
Consistency

Materiality Concept Conservation Concept

 Thanks

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