ABSTRACT

Accounting is the language of business. As language is the medium of expression between

two or more persons, so also accounting is the medium through which information about a

business is conveyed to various parties such as owner, creditor, banker, government, etc.

Therefore accounting information should be prepared in such a manner that it will be

understandable to all. If accountants use different languages, it will not be understandable to

all in the same manner. If different firms follow different methods and principles to record

business transactions, the financial statements prepared by them will suffer from the

disadvantages of biasness, unreliability and incomparability hence not acceptable by others.

In order to understand the same thing in the same sense, all firms should follow some

common rules, principles and methods to maintain their books of accounts. The common

rules that the business houses follow to maintain their books of accounts are termed as

Generally Accepted Accounting Principles (GAAP). GAAP consists of certain assumptions,

concepts and conventions which is essential for fruitful accounting practice whose following

is a necessity.

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 CONTENTS

SL. NO. TOPIC PAGE NO.

01 INTRODUCTION TO ACCOUNTING 06

OBJECTIVES, ADVANTAGES, LIMITAIONS OF

02 07
ACCOUNTING

03 ACCOUNTING CONCEPTS AND CONVENTIONS 08

04 CONCEPTS 08-11

05 CONVENTIONS 11-12

06 USE OF GAAP IN ACCOUNTING PROBLEMS 13

07 CONCLUSION 14

08 BIBILIOGRAPHY 15

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 INTRODUCTION

Accounting is the language of business and it is used to communicate

financial information. Accountancy is the practice of recording, classifying, and reporting

on business transactions for a business. It provides feedback to management regarding

the financial results and status of an organization. Accounting or accountancy is

the measurement, processing, and communication of financial information about economic

entities such as businesses and corporations. The modern field was established by

the Italian mathematician Luca Pacioli in 1494. Accounting, which has been called the

"language of business", measures the results of an organization's economic activities and

conveys this information to a variety of users, including investors, creditors, management,

and regulators. Practitioners of accounting are known as accountants. It calculates and records

business transactions and prepares financial statements for the external users in accordance

with generally accepted accounting principles (GAAP). The principles which serve as the

rules for accounting for financial transactions and preparing financial statements, are known

as the “Generally Accepted Accounting Principles,” or GAAP.

According to American Accounting Association, Accounting is “The process of

identifying, measuring and communicating economic information to permit informed

judgments and decisions by users of the information.’’

According to AICPA, “Accounting is the art of recording, classifying and summarizing in a

significant manner and in terms of money, transactions and events, in part, at least, of a

financial character and interpreting the result thereof.”

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OBJECTIVES OF ACCOUNTING:-

 To keep systematic record of business transactions

 To ascertain the operational profit or loss, financial position, amounts payable or

receivable

 To watch the movement of capital and progress of business

 To protect and control business properties

ADVANTAGES OF ACCOUNTING:-

 Helps in keeping a systematic and permanent record of business, which may be

referred from time to time.

 Proper maintenance prevents irregularities, misappropriations, frauds, errors, etc.

 Acts as an evidence in the settlement of disputes with creditors.

 Helps in evaluating the financial position, profitability and gives vital information to

the users of financial statements

 Helps in assessment of tax liability

LIMITATIONS OF ACCOUNTING:-

 Deals with only monetary transactions. It does not consider non monetary

transactions.

 Provides only historical data

 Does not establish cause and effect relationship

 Does not disclose the present value of the business

 Does not provide timely information and detailed analysis

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 ACCOUNTING CONCEPTS AND CONVENTIONS

Accounting provides financial information about a business organisation. For this

information to be prepared on uniform basis entire accounting is based on certain principles.

The principles which constitute the ground rules for financial reporting are termed as

generally accepted accounting principles [GAAP].

ACCOUNTING CONCEPTS :

Concepts are the assumptions and logical considerations and notions which are generally and

widely accepted. Accounting concepts are the basic assumptions or conditions upon which

the science of accounting is based. Following are the accounting concepts :-

1. BUSINESS ENTITY CONCEPT :-

This concept implies that a business unit is separate and distinct from the person who

supplied capital to it. Irrespective of the form of the organization, a business unit has

got its own individuality as distinguished from the person who owns or control it. It

says that always the books of accounts must be prepared from the view point of firm

assuming that the firm is different from its owners. This concept enables to record

transactions between business and the proprietor. Although in the eyes of law a sole

trader and his business or the partners and their business are one and the same, for

accounting purposes they are treated as separate entities.

2. MONEY MEASUREMENT CONCEPT :-

In accounting everything is recorded in terms of money. Events or transactions which

cannot be expressed in terms of money are not recorded in the boks of accounts even

if they are very important or useful for business. It achieves homogeneity of financial

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 data for which money can be used as the only practical measuring unit. Money is used

as common denominator and the events should not measure in tonnes, kilos, quintals.

3. GOING CONCERN CONCEPT :-

An enterprise is normally viewed as a going concern that is continuing in operation

for the foreseeable future. It is assumed that the business will continue in future at

profit for an indefinite period of time. It means a business is seemed to be going

concern but not a gone concern. Therefore the transactions should be recorded with

assumption of going concern. It does not imply permanent existence but simple

stability and continuity for a period sufficient to carry business plans. Only basing

upon this concept the business used to make transactions like credit purchases, credit

sales and transactions like prepaid expenses are recorded in the books.

4. DUAL ASPECT CONCEPT :-

This is the basic concept of accounting. As per this concept every business transaction

has a dual effect. According to this concept, the transaction will have two aspects –

(i) Receiving of benefit (ii) Giving of benefit

Therefore, a giver necessarily implies a receiver and vice versa. The accounting

equation also depends upon this concept. It proves that for every debit there is an

equal and corresponding credit and vice versa. The accounting equation states that at

any point of time the assets of any entity must be equal to the total of capital and

liabilities. Therefore, Assets = Capital + Liability.

5. COST CONCEPT :-

This concept does not recognise the realisable value, the replacement value of the real

worth of an asset. According to this concept, the asset purchased must be recorded in

the books at a price which is actually paid to acquire it but after adjustment of

depreciation. As the real worth of the asset changes from time to time, it does not

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 mean that the value is wrongly recorded in the books. The book value of the assets do

not reflect the real value of assets. This idea that the transaction should be recorded at

cost rather than at a subjective or arbitrary value is known as cost concept.

6. MATCHING CONCEPT:-

According to this concept, to find out the results of business every year the revenues

are matched with the expenses. If revenue exceeds the expenses then it is profit and if

expenses exceeds revenue there is loss. The carryings and expenses shown in an

income statement must both refer to the same goods transferred or services rendered

during the accounting year. To ascertain the profit made during a period, it is

necessary to match revenues with the expenses of the period.

7. ACCOUNTING PERIOD CONCEPT:-

According to this concept, the entire life span of the business is divided into some

years where each year is known as accounting year or financial year on business year.

It is a period of 12 months commencing from 1 st January and ends of 31 st December

but for income tax purpose the accounting year is from 1 st April to 31st March. The

books of accounts are prepared for year and the performance of business is evaluated

for this period, profit and loss is determined for this period. The financial statements

are prepared at the end of every year which will be used for performance evaluation,

tax calculation, etc.

8. REALIZATION CONCEPT:-

It is also known as revenue recognition concept. As per this concept the profit should

be considered only when it is realized. Revenue is recognised only when sale is

affected or the service is rendered. However, in order to recognise revenue receipt of

cash is not essential. It follows the convention of conservatism. No anticipated profit

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 should be taken into accounts. But credit sales and accrued incomes are taken in profit

and loss account on date of preparing accounts to determine true net profit or net loss.

9. STABLE MONETARY UNIT CONCEPT :-

This concept presumes that the purchasing power of money or monetary unit remains

constant throughout, thus ignoring the effect of rising or falling of purchasing power

of monetary unit due to deflation or inflation. The market changes are to be ignored

and the unit of money i.e. rupees is to be maintained.

ACCOUNTING CONVENTIONS-

Convention means established usage and are based on customs. They are the traditional

methods based on customs & practicability may having some logic behind its usage.

Conventions are customs guiding the preparation of accounting statements.

1. CONVENTION OF FULL DISCLOSURE:-

According to this convention the books of accounts must disclose complete

accounting information. The information must be reliable, relevant which is beneficial

to shareholders, creditors, bankers, etc. Earlier this concept was voluntary but now-a-

days the enactment of Right to Information Act made compulsory the disclosure of

relevant information

2. CONVENTION OF PRUDENCE(CONSERVATISM):-

It says that “anticipates no profit, but provide for all losses”. The unrealized profit

should not be recorded in the books. Therefore the stock is valued at cost price or

market price whichever is lower. Basing upon this convention only provisions are

made for repairs, bad debts, provision for discount on debtors and creditors. As per

this convention all prospective losses are taken into consideration but not all

prospective profits.

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3. CONVENTION OF MATERIALITY:-

Materiality refers to the relative importance of a item or event. This convention

implies that importance must be given to the item basing upon their relative

magnitude in order to help the management to rely on the financial statements &

make judgement. Therefore, keeping in view the convention of materiality,

unimportant items are either left out or merged with other items.

4. CONVENTION OF OBJECTIVITY:-

This convention says that every transaction recorded in the books must be supported

by proper documentary evidence. Invoices, bills, cash memos, etc. are used as

documentary evidence. The accounting information is objective , if it is not influenced

by personal bias or judgement of those who provide it.

5. CONVENTION OF CONSISTENCY :-

The comparison of one accounting period with other is possible only when the

convention of consistency is followed. It means accounting from one accounting

period to another should on the same basis. If stock is valued at cost or market price

whichever is less, this principle should be followed every year. Any change from one

method to another would lead to inconsistency. However consistency does not mean

non flexibility. It should permit introduction of improved techniques of accounting.

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 USE OF CONCEPTS AND CONVENTIONS IN

ACCOUNTING RECORDS(PROBLEMS)

1. Business Entity Concept :- Separate Tax Calculation For Business And Proprietor,

Preparation Of Capital And Drawings Account

2. Money Measurement Concept :- Not Recording Of Employees Skill Level, Product

Durability

3. Going Concern Concept :- Making Credit Sales, Prepaid Expenses, Etc

4. Accounting Period Concept :- Header Of Income Statement And Balance Sheet

5. Cost Concept :- Writing Book Value Of Assets While Carrying Forward Not Market

Or Real Value

6. Realization Concept :- Advance Payment Of Goods, Recording Debtors Including The

Interest

7. Matching Concept :- Preparing P&L A/C To Find Out Net Profit

8. Dual Aspect Concept :- Tally Of Balance Sheet

9. Stable Monetary Concept :- Maintaining Rupee As Monetary Unit Every Year

10. Convention Of Consistency :- Maintain Of Straight Line Method For Charging

Depreciation Every Year

11. Convention Of Materiality :- Inclusion Of Refreshment Expenses In Entertainment

Expenses

12. Convention Of Objectivity :- Sales Invoice No. Column In Sales Book

13. Convention Of Prudence :- Recording Of Closing Stock At Cost Or Market Price

Whichever Is Lower In Balance Sheet

14. Convention Of Full Disclosure :- Publication Of Financial Statements

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 CONCLUSION
Accounting principles based on certain concepts, convention, and tradition have been evolved

by accounting authorities and regulators and are followed internationally. These principles,

which serve as the rules for accounting for financial transactions and preparing financial

statements, are known as the “Generally Accepted Accounting Principles,” or GAAP. The

application of the principles by accountants ensures that financial statements are both

informative and reliable. It ensures that common practices and conventions are followed, and

that the common rules and procedures are complied with. This observance of accounting

principles has helped developed a widely understood grammar and vocabulary for recording

financial statements. There are several procedural convention which though of great

importance affect the manner in which financial accounting information is selected ,analyzed

and communicated . Without the application of these concepts and conventions no financial

statement can be said to be reliable or uniform. To bring uniformity in the preparation of

financial statements and help the firms in presenting accurate results and financial position,

adoption of concepts and convention is highly essential. From the above given examples, we

can also see the various uses of these in our day-to-day accounting activities. Hence, to

become a good accountant possession of knowledge about all concepts and conventions is

necessary. This project helped a lot to gain more and more and deep knowledge about these

concepts and conventions.

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 BIBILIOGRAPHY (REFERENCE)

 BOOKS REFERRED:

 Sahu S K, Swain N, Jain N: 2016: Fundamentals Of Accounting - I :2.1 –

2.18

 Juneja C M, Arora J S, Chawla R C, Sahoo P C: 2017 : Double Entry Book

Keeping Class XI : 2.1 – 2.34

 Parida J K, Dash H : 2016 : Accountancy paper – 1 : 2.1 - 2.42

 NEWSPAPERS &JOURNALS:

 Commerce and Business Researcher

 Economic Times

 Indian Journal of Accounting

 WEBSITES:

 en.wikipedia.org

 www.slideshare.net

 www.tutor2u.net

 www.mbacrystalball.com

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