Accounting concepts and principles Commerce

Actually There Are A Number Of
Accounting Concepts And Principles
Based On Which We Prepare Our
Accounts.
These Generally Accepted Accounting
Principles Lay Down Accepted
Assumptions And Guidelines And Are
Commonly Referred To As Accounting
Concepts.

3
1. Business Entity
2. Money Measurement
3. Cost Concept
4. Consistency
5. Conservatism
6. Going Concern
7. Realization

4
8. Accruals
9. Dual aspect
10.Disclosure
11.Materiality
12.Revenue recognition
13.Matching principle
14.Accounting standards

 All Transactions Of The Business Are Recorded
In Terms Of Money
 It Provides A Common Unit Of Measurement
 E.G.: If The Business Owns 2 Computers, 2
Buildings, 5 Tables, 5 Chairs, 1 Motor Car, Then
It Is Difficult To Understand The Value Business.
If It Is Expressed In Monetary Terms Such As. 2
Computers= Rs 75000 + 2 Buildings 10, 00,000
+ 5 Table- Rs 15,000 + 5 Chairs = Rs 5,000 + 1
Motor Car = 3, 80,000 = Total Rs 14, 75,000.

Assets Should Be Shown On The Balance
Sheet At The Cost Of Purchase Instead Of
Current Value.
 Suppose A Firm Purchases A Building For Rs
50, 00,000 But The Value Of That Building Is
Rs 60, 00,000. In The Books Of Account
Building Will Be Recorded Rs 50, 00,000
Only And Not Rs 60, 00,000.

Companies Should Choose The Most Suitable
Accounting Methods And Treatments, And
Consistently Apply Them In Every Period.
Changes Are Permitted Only When The New
Method Is Considered Better And Can Reflect
The True And Fair View Of The Financial
Position Of The Company.
The Change And Its Effect On Profits Should
Be Disclosed In The Financial Statements.

Revenues And Profits Are Not Anticipated.
Only Realized Profits With Reasonable
Certainty Are Recognized In The Profit
And Loss Account.
However, Provision Is Made For All
Known Expenses And Losses Whether The
Amount Is Known For Certain Or Just An
Estimation.
This Treatment Minimizes The Reported
Profits And The Valuation Of Assets.

The Business Will Continue In Operational
Existence For The Foreseeable Future.
Financial Statements Should Be Prepared
On A Going Concern Basis Unless
Management Either Intends To Liquidate
The Enterprise Or To Cease Trading.

 Revenues Should Be Recognized When The Major
Economic Activities Have Been Completed.
 Sales Are Recognized When The Goods Are Sold
And Delivered To Customers Or Services Are
Rendered.
 E.g.: An Office Was Purchased A Few Years Ago
For Rs 5 Lakhs, Its Current Market Value May Be
Rs 70 Lakhs. However, It Will Not Be Recorded In
The Books, At 70 Lakhs, Unless It Is Actually Sold
And The Higher Value Is Realized In Cash.

• All Expenses And Incomes Are To Be Shown
In The Books In The Period In Which They
Are Incurred, Whether Actually Paid In Cash
Or Not.
• E.G.: If The Financial Year Ends On 31 St
March And The Rent Of March Will Be Paid
In April, Which Is The Next Financial Year.
This Rent Will Be Treated As An Expense Of
The Current Year, Even Though It Has To Yet
Been Paid.
• This Concept Helps To Calculate The Correct
Amount Of Profit Of Loss Of A Particular
Period.

This Concept Recognizes That Every Business
Transaction Has Two Main Aspects. The Aspects
Of Debit And The Accepts Of Credit. E.G.: If There
Is Purchases Of Goods, It Involves Two Aspects-
One, The Receipt Of Goods And, Second, The
Payment Of Cash. The Total Amount Debited
Always Equals The Total Amount Credited.
 Assets = Liabilities + Capital
Or
 Capital = Assets- Liabilities
As A Matter Of Fact The Entire System Of Double
Entry Book – Keeping Is Based On This Concept.

 Financial Statements Should Be Prepared
To Reflect A True And Fair View Of The
Financial Position And Performance Of
The Enterprise.
 All Material And Relevant Information
Must Be Disclosed In The Financial
Statements.

 Immaterial Amounts May Be Aggregated
With The Amounts Of A Similar Nature
Or Function And Need Not Be Presented
Separately.
 Materiality Depends On The Size And
Nature Of The Item.

The Realization Concept Develops Rules
For The Recognition Of Revenue.
• The Concept Provides That Revenues Are
Recognized When It Is Earned, And Not
When Money Is Received.
• A Receipt In Advance For The Supply Of
Goods Should Be Treated As Prepaid
Income Under Current Liabilities.
• Since Revenue Is A Principal Component
In The Measurement Of Profit, The
Timing Of Its Recognition Has A Direct
Effect On The Profit.

• Expenses Incurred In An Accounting Period
Should Be Matched With The Revenue
Recognized In That Period. E.G. If Revenue
And Unaccrued Revenues.
• Matching Does Not Mean That Expenses
Must Be Identifiable With Revenues.
• Expenses Charges Of A Period May Or May
Not Be Related To The Revenue Recognized
In That Period.
• The Appropriate Costs Have To Be Matched
Against The Appropriate Revenues For That
Accounting Period.

• Standards Of Accounting Is Recommended By
The Institute Of Chartered Accountants Of India
Are Prescribed By The Central Government In
Consultation With The Advisory Committee Of
Accounting Standards.
• Accounting Standards Are Written Policy
Documents Issued But The Expert Accounting
Body Or By Government To Other Regulatory
Body Covering Following Various Aspects.
• The Council Of The Institute Of Chartered
Accountants Of India Has So Far Issued Twenty
Eight Accounting Standards.

List of Accounting standards…
 AS 1: Disclosure of Accounting
Principles.
 AS 2: Valuation of Inventories.
 AS 3: Cash Flow Statements.
 AS 4: Contingencies and Events
Occurring After the Balance Sheet
Date.
 AS 5: Net Profit or Loss for the
Period, Prior Period Items and
Changes in Accounting Policies.
 AS 6: Depreciation Accounting .
 AS 7 (revised): Construction
Contracts.
 AS 8: Accounting for Research and
Development.(withdrawn)
 AS 9: Revenue Recognition .
 AS 10: Accounting for Fixed Assets.
 AS 11 (Rev. 2003): The Effects Of
Changes In Foreign Exchange Rates.
 AS 12: Accounting for Government
Grants.
 AS 13: Accounting for Investments.
 AS 14: Accounting for
Amalgamations.
 AS 15 (Rev. 2005): Employee
Benefits.
 AS 16: Borrowing Costs.
 AS 17: Segment Reporting .
 AS 18: Related Party Disclosures.
 AS 19: Leases.
 AS 20: Earnings Per Share.

 AS 21: Consolidated Financial Statements.
 As 22: Accounting For Taxes On Income.
 As 23: Accounting For Investments In Associates In Consolidated
Financial Statements.
 As 24: Discontinuing Operations.
 As 25: Interim Financial Reporting.
 As 26: Intangible Assets.
 As 27: Financial Reporting Of Interests In Joint Ventures.
 As 28: Impairment Of Assets.
 As 29: Provisions, Contingent Liabilities And Contingent Assets.
 As 30: Financial Instruments: Recognition And Measurement.
 As 31: Financial Instruments: Presentation .
 As 32: Financial Instruments: Disclosures.
LIST OF ACCOUNTING STANDARDS…
List of Accounting standards cont…

Accounting concepts and principles Commerce

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