Basic Accounting Concepts and Conventions

BASIC ACCOUNTING CONCEPTS AND CONVENTIONS

GAAP (Generally Accepted Accounting Principles)

What is GAAP? A set of standards generally accepted acce pted and universally practiced by accountants 1. Indi Indica cates tes ho how w econo economi micc event eventss are are reported 2. Gene Generat rated ed by by th thee Financ Financial ial Ac Acco coun unti ting ng Standards Board (FASB) and Securities & Exchange Commission (SEC)

FUNDAMENTAL ACCOUNTING CONCEPTS AND ASSUMPTIONS Externally communicated accounting 

information must be prepared in accordance with accounting standards that are understood by both the senders and the users of the information. These standards are known as Generally Accepted Accounting Principles (GAAP), and provide the general framework for  determining what information is included in the financial statements and how this information is to be presented. Since accounting is a service activity, these principles reflect the needs of the society and not those of the accountants or any other single constituency. These are the guidelines for measurement and presentation of accounting information and are used by professional accountants in preparing accounting information and reports

There are 12 general accounting  principles:            

The Money Measurement Entity Going concern Cost Dual aspect Accounting period Conservatism Realization Matching Consistency Materiality Objectivity

The Money Measurement Concept:  

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Record should be made of that information that can be expressed in monetary terms Although the business may own seven buildings, five boilers, fifty cars, thirty trucks, you cannot add them together simply like that and get to know what the business is worth. Expressing these items in monetary terms by saying that one has buildings worthRs15 crores, boilers worth Rs 50 lac, cars worth Rs 1 crore and trucks worth¶s 2 crores would make it easier for one to add up these items by adding their monetary values. We may not be able to add apples and oranges directly but we can add them easily by expressing them in their  monetary terms. So the money provides a common denominator by which the resources and other factors about the business entity can be expressed and valued. Expressing in monetary terms also helps in understanding the changes their impact on the value of the resources. As you see this concept imposes a severe limitation on the scope of accounting. It is impossible for the accounting to record or report the health of the key people in the organization or the plant that is not working or the labor is going on strike or that the key people are leaving the organization and other 

Entity Concept: ccounts can only be kept for  entities which are different from the  persons who are associated with these entities.

 A

The Going Concern Concept: ccounting records, events and  transactions on the assumption that the entity will continue to operate for an indefinitely long   period of time.

 A

The Cost Concept: Assets are always shown at their cost price rather than their market price  Every transaction must be recorded at its acquisition price.  This does not mean that the asset will always be shown at the cost price. It means that the asset is recorded at its cost price and is systematically reduced or increases in value by charging depreciation/appreciation.  This is applicable to fixed assets and not the current assets. 

Dual Aspect Concept 

The value of the assets owned by the company is equal to the claims on these assets.

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This is the basic concept of  accounting.

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Every Dr entry has its corresponding Cr entry.

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This concept can be expressed as ASSETS = CAPITAL + LIABILITIES

Accounting Period Concept ccounting measures activity for a specified interval of time, usually a year .

 A

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At the end of each period an income statement and balance sheet are prepared for finding the profit and loss and financial position of the business as on the last day of the accounting period.

Matching

Concept

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Matching means appropriate association of related revenues and expenses.

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The profit of the business is ascertained only when the revenue earned during a particular period is compared with the expenditure incurred for earning that particular  revenue.

R ealization

Concept

he sale is considered to have taken place only when either the cash is received or some third party  becomes legally liable to pay the amount .

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According to this concept only those transactions are recorded in accounting which have actually taken place and not the ones that will take place in the future.

ACCOUNTING CONVENTIONS 

Conservatism

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Consistency

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Materiality

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Full Disclosure

Conservatism 

Anticipate the profits but provide for all losses.

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The idea behind this concept is that the

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-recognize revenues only when they are reasonably certain

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- Recognize expenses as soon as they are reasonably possible

Consistency 

According to this convention whatever principle or method is adopted for recording in the books should remain unchanged from one period to another.

Materiality 

Insignificant events would not be recorded if the benefit of recording them does not justify the cost.

Full 

Disclosures

According to this concept ,the accounts should be prepared honestly all the relevant information should be disclosed

ACCOUNTING STANDAR DS The purpose of accounting standards is to prescribe a standard solution or reduce the alternative permissible solutions to such accounting issues. Accounting standards attempt to harmonize diverse accounting treatments.  Accounting standards codify (that is, set out systematically) the generally accepted accounting rinci les 

ACCOUNTING STANDAR DS 

There are four accounting standards

- Measurement Standard - Policy Standard - Disclosure Standard - Concept Standard

MEASUR EMENT

STANDAR D 

This standard provides guidance for accounting valuation.

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For example , how an asset or a liability be valued.

POLICY STANDAR D 

This standard prescribes the accounting treatment of an accounting issue.

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For example ,an accounting treatment for research and development

DISCLOSUR E STANDAR D 

Disclosure means providing supplementary information to make the financial statements more meaning ful.

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For example, segmental reporting and related party disclosures.

CONCEPT STANDAR DS 

This type standard of standard does not address any specific accounting policy.

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For example, standard about fundamental accounting assumptions or the criteria for  choice of accounting policies.

Contd. 

The above mentioned principles, practices, modifying principles, policies and standards are regularly followed while preparing the income statements.

Accounting Standards 

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Until

the Central Government prescribes accounting standards, accounting standards issued by the ICAI shall be deemed to be the accounting standards.  Accounting Standards Issued by ICAI: The Accounting Standards issued by the Council of the Institute of Chartered Accountants of India (lCAI) up to January 2004 are listed below:

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Number

of the Accounting Standards Standards AS1 policies AS2 (Revised) AS3(Revised) AS4(Revised) events occurring after the balance

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AS5(Revised) the period, prior period items

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accounting policies. AS6(Revised) AS 7 construction contracts.

Title of the Accounting Disclosure of accounting Valuation of Inventories Cash Flow Statements Contingencies and Sheet date. Net Profit and loss for  And changes in Depreciation accounting Accounting for 

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AS 8 and development AS 9 AS 10 assets AS11 changes in Foreign

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AS 12 government grants AS 13 investments AS 14 Amalgamations AS 15 Retirement Benefits in the financial

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AS 16

Accounting for research Revenue Recognition Accounting for fixed Accounting for effects in Exchange rates. Accounting for  Accounting for  Accounting for  Accounting for  Statements of Employees Borrowing costs

Accounting Standards        

AS 17 AS 18 Impairment of ASSETS AS 29 AS 19 AS 20 AS 21 Statements AS 22 income AS 23 Investment in Associates in Consolidated

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AS 24 AS 25 Reporting AS 26 AS 27 Interest in joint ventures AS 28 Assets

Segment Reporting Related party disclosures Leases Earnings per share Consolidated Financial Accounting for taxes on Accounting for  Financial Statements. Discontinuing operations Interim Financial Intangible assets Financial Reporting of