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Accounting Concepts & Principles

Home > PowerPoint Slides > Accounting Concepts & Principles
Published in: ACCOUNTS | B.Com Tuition
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Explanation and Clarification of Basic Accounting Concepts and Principles.

Dr. A / Delhi

22 years of teaching experience

Qualification: Ph.D ( - 2012), M.Com ( - 2002), MBA/PGDM ( - 2010), B.Com ( - 2000)

Teaches: Accountancy, Economics, Costing, Financial Management, Statistics, BBA Subjects, Management Subjects

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  1. ACCOUNTING CONCEPTS AND 10 PRINCIPLES
  2. MEANING OF ACCOUNTING PRINCIPLES Accounting principles refer to the rules and O actions adopted by the accountants globally for recording accounting transactions. These are classified into two categories: O Accounting concepts Accounting conventions o
  3. 1, O O 2. Accounting Concepts Accounting concepts include the assumptions and conditions on which the science of accounting is based. These are also known as accounting standards. Accounting Conventions Accounting conventions include the customs and traditions that assists the accountants in preparing accounting statements. o
  4. ACCOUNTING CONCEPTS & CONVENTIONS O O O O O O O O O O O O O Business entity Money Measurement/stable monetary unit Going Concern Historical Cost Prudence/conservatism Materiality Objectivity Consistency Accruals/matching Realization Uniformity Disclosure Relevance o
  5. BUSINESS ENTITY
  6. BUSINESS ENTITY Meaning O The business and its owner(s) are two separate existence entity Any private and personal incomes and expenses of the owner(s) should not be treated as the incomes and expenses of the business 3
  7. Examples O Insurance premiums for the owner's house should be excluded from the expense of the business The owner's property should not be included in the premises account of the business Any payments for the owner's personal expenses by the business will be treated as drawings and reduced the owner's capital contribution in the business 3
  8. MONEY MEASUREMENT
  9. MONEY MEASUREMENT Meaning O All transactions of the business are recorded in terms of money 3 It provides a common unit of measurement Examples O Market conditions, technological changes and the efficiency of management would not be disclosed in the accounts o
  10. 0 10 0 ? GOING CONCERN CONCEPT D4dn9 9 / 0 /
  11. GOING CONCERN Meaning O 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, or has no realistic alternative but to do so 3 o
  12. Example O Possible losses form the closure of business will not be anticipated in the accounts Prepayments, depreciation provisions may be carried forward in the expectation of proper matching against the revenues of future periods Fixed assets are recorded at historical cost 3 o
  13. HISTORICAL COST
  14. HISTORICAL COST Meaning O Assets should be shown on the balance sheet at the cost of purchase instead of current value Example O The cost of fixed assets is recorded at the date of acquisition cost. The acquisition cost includes all expenditure made to prepare the asset for its intended use. It included the invoice price of the assets, freight charges, insurance or installation costs 3 o
  15. PRUDENCE/CONSERVATISM
  16. PRUDENCE/CONSERVATISM Meaning O Revenues and profits are not anticipated. Only realized profits with reasonable certainty are recognized in the 3 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 o
  17. Example O Stock valuation sticks to rule of the lower of cost and net realizable value The provision for doubtful debts should be made Fixed assets must be depreciated over their useful economic lives 3 o
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  19. MATERIALITY Meaning O 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 3 o
  20. Example O Small payments such as postage, stationery and cleaning expenses should not be disclosed separately. They should be grouped together as sundry expenses The cost of small-valued assets such as pencil 3 sharpeners and paper clips should be written off to the profit and loss account as revenue expenditures, although they can last for more than one accounting period 20
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  22. OBJECTIVITY Meaning O The accounting information should be free from bias and capable of independent verification The information should be based upon verifiable evidence such as invoices or contracts 3 o
  23. Example O The recognition of revenue should be based on verifiable evidence such as the delivery of goods or the issue of invoices 3 o
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  25. CONSISTENCY Meaning O Companies should choose the most suitable accounting methods and treatments, and consistently apply them in every period 3 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 o
  26. Examples O If a company adopts straight line method and should not be changed to adopt reducing balance method in other period If a company adopts weight-average method as stock valuation and should not be changed to other method e.g. first-in-first-out method 3 26
  27. ACCRUALS/MATCHING
  28. ACCRUALS/MATCHING Meaning O Revenues are recognized when they are earned, but not when cash is received Expenses are recognized as they are incurred, but not when cash is paid The net income for the period is determined by subtracting expenses incurred from revenues earned 3 28
  29. Example O Expenses incurred but not yet paid in current period should be treated as accrual/accrued expenses under current liabilities Expenses incurred in the following period but paid for in advance should be treated as prepayment expenses under current asset 3 Depreciation should be charged as part of the cost of a fixed asset consumed during the period of use 29
  30. PROBLEMS IN THE RECOGNITION OF EXPENSES Normally, expenses represents resources O consumed during the current period. Some costs may benefit several accounting periods, for example, development expenditures, depreciation on fixed assets. 30
  31. RECOGNITION CRITERIA FOR EXPENSES Association between cause and effect O Expenses are recognized on the basis of a direct association between the expenses incurred on the basis of a direct association between the expenses incurred and revenues earned For example, the sales commissions should be accounted for in the period when the products are sold, not when they are paid o
  32. Systematic allocation of costs O When the cost benefit several accounting periods, they should be recognized on the basis of a systematic and rational allocation method For example, a provision for depreciation should be made over the estimated useful life of a fixed asset o Immediate recognition If the expenses are expected to have no certain future benefit or are even without future benefit, they should be written off in the current accounting period, for example, stock losses, advertising expenses and research costs o
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  34. REALIZATION Meaning Revenues should be recognized when the major O economic activities have been completed Sales are recognized when the goods are sold and O delivered to customers or services are rendered 34
  35. RECOGNITION OF REVENUE The realization concept develops rules for the O recognition of revenue The concept provides that revenues are recognized O when it is earned, and not when money is received A receipt in advance for the supply of goods should O be treated as prepaid income under current liabilities Since revenue is a principal component in the O measurement of profit, the timing of its recognition has a direct effect on the profit o
  36. RECOGNITION CRITERIA FOR REVENUES O O The uncertain profits should not be estimated, whereas reported profits must be verifiable Revenue is recognized when 1. 2. 3. The major earning process has substantially been completed Further cost for the completion of the earning process are very slight or can be accurately ascertained, and The buyer has admitted his liability to pay for the goods or services provided and the ultimate collection is relatively certain 36
  37. Example O Goods sent to our customers on sale or return basis This means the customer do not pay for the goods until they confirm to buy. If they do not buy, those goods will return to us Goods on the 'sale or return' basis will not be treated as normal sales and should be included in the closing stock unless the sales have been confirmed by customers 3 o
  38. PROBLEMS IN THE RECOGNITION OF REVENUE Normally, revenue is recognized when there is a O sale The point of sales in the earning process is selected O as the most appropriated time to record revenues However, if revenue is earned in a long and O continuous process, it is difficult to determine the portion of revenue which is earned at each stage Therefore, revenue is permitted to be recorded O other than at the point of sales 38
  39. EXCEPTIONS TO RULE OF SALES RECOGNITION 1. 2. Long-term contracts Owning to the long duration of long-term contracts, part of the total profit estimated to have been arisen from the accounting period should be included in the profit and loss account Hire Purchase Sale Hire purchase sales have long collection period. Revenue should be recognized when cash received rather than when the sale (transfer of ownership) is made The interest charged on a hire purchase sale constitutes the profit of transaction 39
  40. 3. Receipts from subscriptions A publisher receives subscriptions before it sends newspapers or magazines to its customers It is proper to defer revenue recognition until the service is rendered. However, part of subscription income can be recognized as it is received in order to match against the advertising expenses incurred 40
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  42. DISCLOSURE Meaning O 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 3 o
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  44. UNIFORMITY Meaning O Different companies within the same industry should adopt the same accounting methods and treatments for like transactions The practice enables inter-company comparisons of their financial positions 3
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  46. RELEVANCE Meaning O Financial statements should be prepared to meet the objectives of the users Relevant information which can satisfy the needs of most users is selected and recorded in the financial statement 3 46
  47. ACCOUNTING PERIOD CONCEPT Monitor the performance of the organization periodically One accounting period will be considered Calculating accounts for more than one accounting period will be tedious
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