Professional Documents
Culture Documents
Accounting Concepts and Conventions 1
Accounting Concepts and Conventions 1
Accounting Concepts and Conventions 1
LECTURE OUTCOMES
To define accounting concepts and conventions.
To use accounting concepts and conventions in preparing accounting books and
financial statements.
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Accounting Principles
A general law or rule, adopted or professed as a guide to action, a
settled ground or basis of conduct or practice.
Man made
Accounting principles are uniform practices which entities follow to
record, prepare and present financial statements. Objectivity
An entity must prepare its financial statements as per acceptable
Usefulness/
accounting principles in order to present true and fair view of state of relevance
affairs of entity.
Accounting
AccountingConventions
Concepts Feasibility
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Cont’d…
Basis Concept Convention
Accounting Concepts
In India there is a basic rule to be followed by
everyone that one should walk or drive on his/her
left hand side of the road.
It helps in the smooth flow of traffic.
Similarly, there are certain rules that an
accountant should follow while recording
business transactions and preparing accounts.
These may be termed as accounting concept.
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Cont’d…
The term ‘concept’ is used to connect accounting
areas, those are the necessary assumptions and
conditions upon which accounting is based.
Cont’d…
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Gautam Adani,
Individual Entity Adani Group of Industries,
Business Entity
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Innovativeness
Attitude Experience
skill TeamPassion
Honesty
work
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Example
Can financial position of the concern be determined with A or B ????
A. Units B. Rupees
Land 10 acres Cost of factory land Rs.12 crore
Cont’d…
For accounting purposes items are to be recorded in money terms i.e., in rupees.
In this case, the cost of factory land may be say Rs.12 crore, office building of
Rs.10 crore, computers Rs.10 lakhs, office chairs and tables Rs.2 lakhs, raw
material Rs. 30 lakhs.
Thus, the total assets of the organisation are valued at Rs. 22 crore and Rs. 42
lakhs.
Therefore, the transactions which can be expressed in terms of money is recorded
in the accounts books, that too in terms of money and not in terms of the quantity.
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Yes/No (Poll)
Say A (Yes) against the information that should be recorded in the books of accounts and
cross mark B (No) against the information that should not be recorded
5. Cost Concept
An asset acquired by a concern is recorded in the books of accounts at historical cost
(i.e., at the price actually paid for acquiring the asset).
The market price of the asset is ignored.
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Cont’d….
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Cont’d….
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Cont’d….
Example
Mohan started a business with Rs 5,00,000 as a primary investment.
Cont’d…
Similarly, if Mohan has to buy equipment on credit for an amount of 10,00,000
from an equipment manufacturing company
1. Purchasing of new equipment on credit increases the asset base of the business
by Rs. 10,00,000.
2. Purchasing of new equipment on credit results in increasing the liabilities of the
business (repay to creditors) by Rs. 10,00,000.
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Activity
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
7. Realization Concept
Profit is earned when goods or services are
provided/transferred to customers.
Example
Kanishka Jeweller received an order to supply gold
ornaments worth Rs. 500000.
Cont’d…
The revenue for the year 2021 for N.P. Jeweller is Rs. 200000.
Mere getting an order is not considered as revenue until the goods have been
delivered.
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
8. Matching Concept
A salesperson makes a 5% commission on
every sale they make in the month of
January, but their commission isn't paid until
February. This means that if they sell $100
worth of products in January, the company
will pay them $5 in February. Despite this,
the amount of commissions they earned—in
this case $5—is required to be reported on
the January statement with the January
product sales of $100.
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Accounting Conventions
Accounting Conventions are the common practices which are universally followed in
recording and presenting accounting information of business.
It helps in comparing accounting data of different business or of same units for different
periods.
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
1. Materiality
Only those transactions, important facts
and items are shown which are useful and
material for the business.
The firm need not record immaterial and
insignificant items.
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Example
A large company has a building in the hurricane zone during Hurricane Sandy.
The company has net income of $10,000,000.
The company building is destroyed and after a lengthy battle with the insurance company,
the company reports an extra ordinary loss of $10,000.
Is it a material information?
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Example
Assume the same example above except the company is a smaller company with only
$50,000 of net income.
Now the loss is 20% of net income.
Is it a material information?
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Poll
ABC LTD has a yearly turnover of $100 million. Which of the following information is material to
the users of its financial statements?
a) ABC LTD has been sued by XYZ LTD for $10 million as damages for breach of contract. The
decision of the Court is still pending.
b) ABC LTD sold goods worth $1 million to its subsidiary DEF LTD.
c) ABC LTD does not disclose details of its operating lease in respect of an office space rented at
$10,000 per annum.
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
2. Full Disclosure
Financial Statements and their notes should present all information that is
relevant and material to the user’s understanding of the statements.
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
3. Conservatism
The Game B/W ANTICIPATION and REALISATION
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Cont’d…
• Making Provision for Bad and Doubtful Debts.
• Showing Depreciation on Fixed Assets, but not appreciation.
• Stock valuation sticks to rule of the lower of cost and net realizable value.
Let us assume that a company XYZ Ltd. is embroiled in a patent lawsuit. XYZ Ltd. is
suing ABC Ltd for patent infringement and is expecting to win a substantial settlement.
Since the settlement is not a surety, XYZ Ltd. does not record the gain in the financial
statements.
WHY??
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
4. Consistency
The accounting practices and methods should remain consistent from one
accounting period to another.
Whatever accounting practice is followed by the business enterprise,
should be followed on a consistent basis from year to year.
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I
Poll
According to which of the following accounting concepts, even the owner of a business
is considered as creditor to the extent of his capital.
a) Money measurement concept
b) Dual aspect concept
c) Business entity concept
d) Revenue recognition concept
ACCM506 – FINANCIAL REPORTING, STATEMENTS AND ANALYSIS – I