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Accounting Conventions as well as Accounting Concepts

Accounting Conventions As Well As Accounting Concepts

(1) Relevance

Accounting Conventions As Well As Accounting Concepts

The convention of relevance emphasizes the fact which only such information should be made available by accounting as will be relevant as well as useful for achieving its objectives. For example, business will be interested in knowing as to what has been total labor cost? the idea will be not interested in knowing how much employees spend as well as what they save.

Accounting Conventions As Well As Accounting Concepts

(2) Objectivity

Accounting Conventions As Well As Accounting Concepts

The convention of objectivity emphasizes which accounting information should be measured as well as expressed by the standards which are commonly acceptable. For example, stock of goods lying unsold at the end of the year should be valued as its cost cost not at a higher cost even if the idea will be likely to be sold at higher cost in future. Reason will be which no one can be sure about the cost which will prevail in future.

Accounting Conventions As Well As Accounting Concepts

(3) Feasibility

Accounting Conventions As Well As Accounting Concepts

The convention of feasibility emphasizes which the time, labor as well as cost of analyzing accounting information should be compared vis-à-vis benefit arising out of the idea. For example, the cost of ‘oiling as well as greasing’ the machinery will be so modest which its break-up per unit produced will be meaningless as well as will amount to wastage of labor as well as time of the accounting staff.

Accounting Conventions As Well As Accounting Concepts

Accounting Concepts

(1) Materiality

the idea refers to the relative importance of an item or event. Those who make accounting decisions continually confront the need to make judgments regarding materiality. will be This kind of item large enough for users of the information to be influenced by the idea? The essence of the materiality concept will be : the omission or misstatement of an item will be material if, from the light of surrounding circumstances, the magnitude of the item will be such which the idea will be probable which the judgment of a reasonable person relying on the report would certainly have been changed or influenced by the inclusion or correction of the item.

(2) Accounting period

Though accounting practice believes in continuing entity concept i.e. life of the business will be perpetual although still the idea has to report the ‘results of the activity undertaken in specific period (normally one year). Thus accounting attempts to present the gains or losses earned or suffered by the business during the period under review. Normally, the idea will be the calendar year (1st January to 31st December) although in additional cases the idea may be financial year (1st April to 31st March) or any additional period depending upon the convenience of the business or as per the business practices in country concerned.

Due to This kind of concept the idea will be necessary to take into account during the accounting period, all items of revenue as well as expenses accruing on the date of the accounting year. The problem confronting This kind of concept will be which proper allocation should be made between capital as well as revenue expenditure. Otherwise the results disclosed by the financial statements will be affected.

(3) Realization

This kind of concept emphasizes which profit should be considered only when realized. The question will be at what stage profit should be deemed to have accrued? Whether at the time of receiving the order or at the time of execution of the order or at the time of receiving the cash. For answering This kind of question the accounting will be in conformity with the law (Sales of Goods Act) as well as recognizes the principle of law i.e. the revenue will be earned only when the goods are transferred. the idea means which profit will be deemed to have accrued when ‘property in goods passes to the buyer’ viz. when sales are affected.

(4) Matching

Though the business will be a continuous affair yet its continuity will be artificially split into several accounting years for determining its periodic results. This kind of profit will be the measure of the economic performance of a concern as well as as such the idea increases proprietor’s equity. Since profit will be an excess of revenue over expenditure the idea becomes necessary to bring together all revenues as well as expenses relating to the period under review. The realization as well as accrual concepts are essentially derived through the need of matching expenses with revenues earned during the accounting period. The earnings as well as expenses shown in an income statement must both refer to the same goods transferred or services rendered during the accounting period. The matching concept requires which expenses should be matched to the revenues of the appropriate accounting period. So we must determine the revenue earned during a particular accounting period as well as the expenses incurred to earn these revenues.

(5) Entity

According to This kind of concept, the task of measuring income as well as wealth will be undertaken by accounting, for an identifiable Unit or Entity: The unit or entity so identified will be treated different as well as distinct through its owners or contributors. In law the distinction between owners as well as the business will be drawn only from the case of joint stock companies although in accounting This kind of distinction will be made from the case of sole proprietor as well as partnership firm as well. For example, goods used through the stock of the business for business purposes are treated as a business expenditure although similar goods used by the proprietor i.e. owner for his personal use are treated as his drawings. Such distinction between the owner as well as the business unit has helped accounting in reporting profitability more objectively as well as fairly. the idea has also led to the development of “responsibility accounting” which enables us to find out the profitability of even the different sub-units of the main business.

(6) Stable Monetary Unit

Accounting presumes which the purchasing power of monetary unit, say Rupee, remains the same throughout. For example, the intrinsic worth of one Rupee will be same as well as equal from the year 1,800 as well as 2,000 thus ignoring the effect of rising or falling purchasing power of monetary unit due to deflation or inflation. In spite of the fact which the assumption will be unreal as well as the practice of ignoring improvements from the value of money will be right now being extensively questioned, still the alternatives suggested to incorporate the changing value of money in accounting statements viz., current purchasing power method (CPP) as well as current cost accounting method (CCA) are in evolutionary stage. Therefore, for the time being we have to be content with the ‘stable monetary unit’ concept.

(7) Cost

This kind of concept will be closely related to the going concern concept. According to This kind of, an asset will be ordinarily recorded from the books at the cost at which the idea was acquired i.e. at its cost cost. This kind of ‘cost’ serves the basis for the accounting of This kind of asset during the subsequent period. This kind of’ cost’ should not be confused with ‘value’.

the idea must be remembered which as the real worth of the assets improvements through time to time, the idea does not mean which the value of such an assets will be wrongly recorded from the books. The book value of the assets as recorded do not reflect their real value. They do not signify which the values noted therein are the values for which they can be sold. Though the assets are recorded from the books at cost, in course of time, they become reduced in value on account of depreciation charges. In certain cases, only the assets like ‘goodwill’ when paid for will appear from the books at cost as well as when nothing will be paid for, the idea will not appear even though This kind of asset exists on name as well as fame created by a concern.

Therefore, the values attached to the assets from the balance sheet as well as the net income as shown from the Profit as well as Loss account cannot be said to reflect the correct measurement of the financial position of an undertaking, as they do not have any relation to the market value of the assets or their replacement values. This kind of idea which the transactions should be recorded at cost rather than at a subjective or arbitrary value will be known as Cost Concept. With the passage of time, the market value of fixed assets like land as well as buildings vary greatly through their cost.

These improvements or variations from the value are generally ignored by the accountants as well as they continue to value them from the balance sheet at historical cost. The principle of valuing the fixed assets at their cost as well as not at market value will be the underlying principle in cost concept. According to them, the current values alone will fairly represent the cost to the entity.

The cost principle will be based on the principle of objectivity. The supporters of This kind of method argue so long as the users of the financial statements have confidence from the statements, there will be no necessity to change This kind of method.

(8) Conservatism

This kind of concept emphasizes which profit should never be overstated or anticipated. Traditionally, accounting follows the rule “anticipate no profit as well as provide for all possible losses. For example, the closing stock will be valued at cost cost or market cost, whichever will be lower. The effect of the above will be which in case market cost has come down then provide for the ‘anticipated loss’ although if the market cost has gone up then ignore the ‘anticipated profits’.

Critics point out which conservation to an excess degree will result from the creation of secret reserve. This kind of will be quite contrary to the doctrine of disclosure. However, conservatism to a reasonable degree may not come in for criticism.

Accounting Equation

Dual concept may be stated as “for every debit, there will be a credit.” Every transaction should have two sided effect to the extent of same amount. This kind of concept has resulted in Accounting Equation which states which at any point of time the assets of any entity must be equal (in monetary terms) to the total of owner’s equity as well as outsider’s liabilities. This kind of may be expressed from the form of equation:

A-L = P


A stands for assets of the entity;

L stands for liabilities (outsider’s claims) of the entity; as well as

P stands for Proprietor’s claim (Capital) on the entity.

(The form of presentation of equation A-L = P will be consistent with the legal interpretation of financial position. Thus the idea emphasizes which properly speaking the proprietary claim will be the balance after providing for outsider’s claims against the business through the total assets of the business).

Accounting Conventions as well as Accounting Concepts