INSTITUTE-UNIVERSITY SCHOOL OF BUSINESS

DEPARTMENT-BACHELOR OF BUSINESS
ADMINISTRATION
Advanced Accounting
(BAT - 165)

Faculty Name : Mr Virender Thakur

ACCOUNTING PRINCIPLES DISCOVER . LEARN . EMPOWER

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 Course Objective
To impart the ability to understand and use
accounting data to make business
decisions.

Course Outcome
CO Title Level
Number
CO1 Students will be able to develop Basic Remember
Principles of Accounting, Accounting  
Standards, Concepts and conventions
CO2 Students will get proficiency in basic Understand Source:
techniques & methods of accounting.   http://www.kkhsou.in/main/management/accountin
CO3 Students can analyze Balance sheets and Understand gconcepts.html
its application in the business
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 TOPICS TO BE COVERED

 Introduction of elements of financial statements

Type of accounting Principles-Basic concept

Principles and modifying principles

Importance and Limitation

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The Elements of Conceptual
Framework
1) Objectives of financial
reporting.

2)Qualitative characteristics of
accounting information.

3)Elements of financial
statements.

4)Recognition and measurement

in financial statements-
assumption, principles and
constraints.
Conceptual
Framework for
Financial
Reporting
 Objectives of Financial
Reporting
Set of general purpose financial information meeting different
needs

Creditors, Investors, Different External Other parties-

Lenders Users Regulators, Tax
Authorities

1.Decision making about providing resources.

2.Identifing resources and claims. 3.Assessing
the prospects of future cash flows. Decision making about
4.Influencing management actions. 5.Estimating may company rules, tax
the value of an entity. 6.Getting all the laws etc.
possible information.
 Qualitative Characteristics of
Accounting
Relevance: Information
Requires financial Predictive • Helps users in predicting future outcomes.
information to be value
related to an
• Enables users to check and confirm earlier predictions or
economic Confirmatory evaluations.
decision. value
Fundamental • Information is material if it is significant enough to
Qualitative Materiality influence the decision of users.

characteristics

• Adequate or full disclosure of all

Completeness necessary information.

Faithful Neutrality • Fairness and freedom from bias

Representation :
Requires to it Free From • No inaccuracies and omissions
represent what to error
purports
represent.
 Qualitative Characteristics of
Accounting Information
Comparability: Comparable information enables
comparisons within the entity and across entities.

Consistency: Closely related to comparability is the notion that consistency of

accounting practices over time permits valid comparisons between different
periods.
Enhancing
Qualitative
Verifiability: Helps to assure users that information represents
characterist ics
faithfully what it purports to represent.

Timeliness: Means providing information to decision-

makers in time to be capable of influencing their decisions.

Understandability: Requiresfinancial information to be understandable

or comprehensible.
 Elements of Financial
Statements
 Assets: Asset is a resource from which future economic benefits are expected to
flow to the entity.

 Liabilities: A liability is an obligation result in an outflow from the enterprise' resources.

 Equity: Equity is the residual interest in the assets of an entity that remains after deducting liabilities.

 Investment by Owners: Increases in equity to obtain or increase ownership

interests (or equity) in a business enterprise.

 Distributions to Owners: Decreases in equity resulting from transferring assets, rendering

services, or incurring liabilities by an enterprise to owners.
 Elements of Financial
Statements
 Revenues: Inflows from activities that constitute an entity's ongoing major or
central operations.

 Expenses: Decreases in economic benefits during an accounting period in the form of outflows.

 Gains: Increases in equity except those that result from revenues or

investments by owners.

 Losses: Decreases in equity except those that result from expenses or

distributions to owners.

 Comprehensive Income: The change in equity by transactions from nonowner sources.

Recognition and Measurement in Financial
Statements- Assumption, Principles and
Constraints
• Assumptions
• Economic Entity – Company keeps its activity separate from its
owners and other businesses.

• Going Concern - Company to last long enough to fulfill objectives

and commitments.

• Monetary Unit - Money is the common denominator.

Periodicity - Company can divide its economic activities
into time periods.
 ACCOUNTING PRINCIPLES

• Accounting principles are man made.

• “A general law or rule, adopted or professed as a guide to action, a

settled ground or basis of conduct or practice.”

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 FEATURES OF ACCOUNTING
PRINCIPLES
 Relevance or usefulness:
- Satisfies the needs of those who use it.
- Able to provide useful information
 Objectivity :
- Based on facts and figures
- No scope for personal bias
 Feasibility :
- Principles should be practicable
- Easy to use otherwise their utility will be limited
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GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP)
• The very basic objective of accounting is to provide financial
information to various interested groups for the purpose of decision
making.

• It is of utmost importance that uniformity and consistency is

maintained in preparing such financial statements.

• If business enterprises are left to have their own notion about the
accounting terms like assets, liabilities, revenue, income and expense
etc. it will lead to utter chaos and confusion.

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GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP)

• To have uniformity and consistency, accounting operates within a

framework of GAAP.

• Accounting being a man made system, must evolve and adjust itself
to the changes in the needs of mankind.

• As a result, accounting principles are not as exact and rigid as are the
laws of natural sciences. Therefore, emphasis is on general, instead of
universal, acceptability of accounting principles.

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GAAP

• The GAAP are the building blocks of the accounting language.

Rather, they are the pillars on which the structure of accounting is
basically resting.

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CLASSIFICATION OF ACCOUNTING
PRINCIPLES

Accounting Principles

Concepts Conventions

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 ACCOUNTING CONCEPTS
• Concepts include those basic assumptions or conditions upon which
the science of accounting is based.

• Accounting concepts, conventions and principles have served as

guidelines in the practice of accounting.

• Concept denotes logical consideration and notion which is generally

and widely accepted.

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 ACCOUNTING CONCEPTS

1. Business Entity Concept:

o Business considered to be distinct from its owners-proprietors,
partners or members.
o Considered as two distinct and separate entities.
o Transaction has to be recorded from point of view of business and
not owners.
o Cash contributed by the proprietor, for example, adds to the cash
resources of the business and hence, is debited to Cash account,
though it reduces the cash resources of the proprietor. The
businessman is just like a creditor of the business.

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 ACCOUNTING CONCEPTS

2. Money measurement concept:

o Only monetary transactions come under accounting framework.
o Money is a common denominator.
o A stable monetary unit to be adopted.

3. Going concern concept:

o Business has an indefinite life.
o Not end or liquidate in the near future.

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 ACCOUNTING CONCEPTS
4. Accounting period concept:
o Divides entire indefinite life of business into smaller periods.
o 12 months considered as one accounting period. Reports the
results of the activity undertaken in ‘specific period’.

5. Cost concept:
o Asset is ordinarily recorded in the books at the price at which it
was acquired i.e. at its cost price.
o Though recorded in the books at cost, in the course of time, they
become reduced in value on account of depreciation charges.
o Known as historical cost concept.
o Assets do not reflect the real worth i.e. Price level changes
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 ACCOUNTING CONCEPTS

6. Dual aspect concept:

o “For every debit, there is a credit”.
o Two sided effect to the extent of same amount.
This concept has resulted in an accounting equation:
Assets – Liabilities = Proprietor’s claim

7. Revenue Recognition Concept:

o Profit should be considered only when realized.
o No anticipated profit should be taken credit of.

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 ACCOUNTING CONCEPTS

8. Matching Concept:
o Expenses should be matched to the revenue of the appropriate
accounting period.
o For Example- Salary paid in January 2011 relating to December 2010
should be treated as expenditure for the year 2010 and not 2011.
9. Accrual Concept:
o Accrual is concerned with expected future cash receipts and payments.
o Make record of all expenses and incomes relating to accounting
period whether actual cash has been disbursed or received or not.
o For e.g. purchases and sales of goods on credit, rent (not yet paid),
salaries outstanding etc.

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 ACCOUNTING CONCEPTS

10. Stable monetary unit concept:

o Purchasing power of monetary unit remains same throughout.

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 ACCOUNTING CONVENTIONS
1. Convention of disclosure:
o Financial statements should disclose all material information
clearly to the reader.
o State the fact of change in accounting policies and methods (if
any)
2. Convention of consistency:
o Same accounting principles for preparing financial statements for
different periods.
o Policy once adopted must not be changed.
o Only be changed by showing the fact in the annual report.
o For e.g. - Depreciation
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 ACCOUNTING CONVENTIONS
3. Convention of conservatism:
o Cautious approach or policy of ‘’Play safe’’.
o Be pessimistic.
o All losses must be provided but profits should not be anticipated.
o Possibility of loss – taken into account at the earliest.
o Prospect of profit – ignored until it does not materialise.

4. Convention of materiality:
o Only significant transactions recorded.
o Insignificant transactions should find no place in the books of
accounts. 25
 MCQ
• 1. The accounting principle that states companies and owners should
be account for separately.
• BUSINESS ENTITY CONCEPT
• GOING CONCERN CONCEPT
• MONETARY UNIT ASSUMPTION
• PERIODICITY ASSUMPTION
2. Assets are recorded at their original purchase price according to the:
• MATERIALITY PRINCIPLE
• HISTORICAL COST PRINCIPLE
• COST BENEFIT PRINCIPLE
• CONSISTENCY PRINCIPLE
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 MCQ

3. Management concealing important financial information violates the:

• MATERIALITY PRINCIPLE
• HISTORICAL COST PRINCIPLE
• FULL DISCLOSURE PRINCIPLE
• CONSISTENCY PRINCIPLE

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 FAQ’S

• Q1.Define Generally Accepted Accounting Principles?

Ans: Accounting principles help govern the world of accounting
according to general rules and guidelines. GAAP attempts to standardize
and regulate the definitions, assumptions, and methods used in
accounting. There are a number of principles, but some of the most
notable include the revenue recognition principle, matching principle,
materiality principle, and consistency principle. The ultimate goal of
standardized accounting principles is to allow financial statement users
to view a company's financials with the certainty that information
disclosed in the report is complete, consistent, and comparable.

Continue…….
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 FAQ’S

Completeness is ensured by the materiality principle, as all material

transactions should be accounted for in the financial statements.
Consistency refers to a company's use of accounting principles over
time. When accounting principles allow choice between multiple
methods, a company should apply the same accounting method over
time or disclose its change in accounting method in the footnotes to the
financial statements.

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 FAQ’S

Q2.Explain International Financial Reporting Standards ?

Ans: Accounting principles differ from country to country. The
International Accounting Standards Board (IASB) issues International
Financial Reporting Standards (IFRS). These standards are used in over
120 countries, including those in the European Union (EU).
The Securities and Exchange Commission (SEC), the U.S. government
agency responsible for protecting investors and maintaining order in
the securities markets, has expressed that the U.S. will not be switching
to IFRS in the foreseeable future. However, the FASB and the IASB
continue to work together to issue similar regulations on certain topics
as accounting issues arise. For example, in 2016 the FASB and the
IASB jointly announced new revenue recognition standards.
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 REFERENCES

1. Gupta, R.L., Radhaswamy,M.(2012). Advanced Accountancy. New

Delhi: Sultan Chand&Sons.
2. Maheswari S.N.,(2018). Introduction to Accounting.New Delhi:
Vikas Publishing House.
3. Shukla, M.C.,Grewal, T.S.,Gupta S.C.(2007). Advanced
Accounts.New Delhi:S.Chandand Company Ltd.

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 SUMMARY

Accounting principles are the rules and guidelines that companies

must follow when reporting financial data.

The Financial Accounting Standards Board (FASB) issues a

standardized set of accounting principles in the U.S. referred to
as generally accepted accounting principles (GAAP)

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THANK YOU

For queries
Email: anita.usb@cumail.in
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