Accounting concepts &

conventions

Dr P S Baliyan
Accounting and Finance
 Accounting Principles
Accounting principles

Concepts Conventions
 Business Entity concept
• Business entity means that the business
it to be treated as a separate entity by
itself independent of the owner’s entity.
The firm and the owner are to be treated
as two separate entities. In the books of
account of business, each transaction is
recorded from the point of view of the
firm, not from the point of view of the
owner.
 Money measurement
• Accounting records only those
transactions which are expressed in
monetary terms, though quantitative
records are kept. This means that even if
money did not exchange hands in a
transaction, the transaction must still be
valued in monetary terms.
 Going concern
• It is assumed that the business will exist for a
long time and transactions are recorded from
this point of view. It is this that necessitates
distinction between expenditure that will
render benefit over a long period and that
whose benefit will be exhausted quickly. This
means that assets and liabilities of the
business are recorded at cost,
 Historical Cost concept

• This concept states that all goods ,

services and assets acquired by the
business should be recorded in the
accounts at the price at which they were
acquired. e.g. assets are normally shown
at cost price.
 Dual aspect concept
• This is the key concept on which the
double entry system is based. This states
that there are two aspects in accounting
transaction, one represented by the
assets of the business and the other by
the claims against them. There is a giver
and a receiver in debit and credit form.
This ensures that debit is equal to credit.
 Accrual/ realisation concept
• Transactions are reported in the financial
period, only when they have been
earned, realised or incurred respectively,
which might not correspond with the
receipt or payment for such transactions.
 Time period concept
• Means it is possible to break up an entity
earning in discrete time period (a month,
quarter, year), necessary to provide
users with financial results on a timely
basis.
Conventions of
accounting:
 Consistency

• It is a fundamental assumption that

accounting policies are consistent from
one period to another. Consistency
serves to eliminate personal bias.
 Full Disclosure
• Apart from legal requirement, good
accounting practice also demands that all
significant information should be
disclosed e.g. not only various assets
have to be stated but also the mode of
valuation should be disclosed.
 Conservatism/ Prudence
• Financial statements are usually drawn up on
rather a conservative basis. Window-dressing,
e.g. showing a position better than what it is,
is not permitted. It is also not proper to show
a position substantially worse than what it is.
In other words, secret reserves are not
permitted.
 GAAP
• What is GAAP?
– Generally Accepted Accounting Practice
– set of principles
– IAS and IFRS statements
• Helps all financial statements to be drawn up in a
similar manner
• Includes a conceptual framework
– General explanation of financial statement preparation
– Basis from which all statements/standards are
prepared