Accounting Conventions and Accounting Concepts

May 22, 2018 | By admin4u | Filed in: Uncategorized.

(1) Relevance

The convention of relevance emphasizes that only information that is relevant and useful to achieve its purpose should be made available through accounting. For example, is your business interested in knowing what was total wage bill? You are not interested in how much your employees spend and what they will save.

(2) Objectivity

The objectivity convention emphasizes that accounting information needs to be measured and expressed with acceptable standards. For example, at the end of the year the unused stock should be valued as if it were not at a higher price, even if it is likely to be sold at a higher price in the future. The reason for this is that no one is sure what the price will be in the future.

(3) Feasibility

The feasibility study emphasizes that analysis of accounting information is the resulting benefit. For example, the cost of "greasing and lubricating" the machine is so small that the fragmentation of the products produced would be meaningless and would mean the loss of working hours and time of accounting staff.

Accounting Concepts [19659002] (1) Significance

Refers to the relative importance of an item or event. Those who make accounting decisions must constantly face the need to make material decisions. Is this element large enough to affect information users? The essence of materiality is the essence of the notion of materiality: the fact that a batch is omitted or misconstrued is essential if the amount of the item is such that it is probable that the judgment of a rational person relying on the report Accounting Period

It believes that the business concept is long-lasting, but it still has to report "the results of a business in a given period (usually over one year), so they have made an accounting attempt to present the gains or losses they have gained or suffered in business In general, the calendar year (1 January to 31 December), but in other cases it may be a financial year (1 April to 31 March) or any other period depending on the convenience of the business or the country concerned from business practice

Due to this concept the revenue and expenditure arising on the accounting year during the accounting period. The problem faced by this concept is the need for proper allocation between capital adequacy and revenue. Otherwise, the results of the financial statements are affected.

(3) Realization

This concept emphasizes that profits should be taken into account only when realized. The question is, at which stage of the profit should you accumulate? Whether at the time of ordering, at the time the order is executed or when the cash is received. In order to answer this question, accounting complies with the law (transit law) and recognizes the principles of the law, ie revenue is generated only when goods are transferred. This means that profits arise when "goods are delivered by the buyer". when the sales are affected

(4) Compliance

Although the business is continuous but its continuity is artificially divided into several accounting years to determine periodic results. This profit is the degree of economic performance of concern and thus increases the owner's equity. Given that the profit exceeds the revenue related to the expenditure, it is necessary to collect the revenues and expenses for the period under review. Accounting and accrual-based concepts are basically due to the fact that earnings generated during the accounting period require revenue. Revenue and expenditure shown in the profit and loss account shall relate to goods transferred or transferred during the accounting period. The right concept requires that expenditure be adjusted to the revenue of the corresponding accounting period. Therefore, we must determine the revenue earned during a given accounting period and the costs incurred in obtaining such revenue.

(5) Entity

According to this concept, the task of measuring income and wealth is accounting for an identifiable entity or entity: The unit or entity thus identified is different and different from its owners or contributors. The distinction between owners and businesses is only the case for public limited companies, but this distinction is also the case in the case of self-employed and partnership. For example, products used in a business business set are handled as business releases, but the owner, ie the similar products used by the owner for personal use, are handled according to his drawings. The difference between the owner and the business unit helped to provide a more objective and fairer account of the profitability of the report. In addition, it has led to the development of "accountability", which enables us to become aware of the profitability of the various sub-sectors of the main business.

(6) Stable Monetary Unity

Accounting assumes that the purchasing power of the monetary unit, say the rupee, remains the same. For example, the internal value of a rupee is the same and equal in the 1800s and 2000s, ignoring the increasing or decreasing purchasing power of the monetary unit due to deflation or inflation. Despite the fact that unrealistic assumptions and changes in the value of money are now widely questionable, alternatives suggest the variable value of money in accounting statements, current purchasing power (CPP) and the current cost accounting method (CCA ) is in the evolutionary phase. Therefore, we are still satisfied with the "stable monetary unit" concept.

(7) Cost

This concept is closely related to the business continuation concept. According to this, a device is usually recorded in the bookkeeping in the price it was obtained, that is, at the price. This "cost" serves as the basis for accounting in the subsequent period. This "cost" should not be confused with "value".

Let's remember that since the real value of the devices changes from time to time, this does not mean that the value of such devices has been mistakenly recorded. The carrying amount of assets does not reflect its fair value. It does not mean that the values ​​mentioned in it are the values ​​for which they can be sold. Although the assets are carried at cost, they are depreciated because of the depreciation due to depreciation. In some cases, only the "goodwill" tool shown in the cost will appear in the bookkeeping and when it does not pay anything, it will not appear, even if it is based on a name and reputation created by concern.

Therefore, the values ​​associated with assets included in the balance sheet and the net income shown in the profit and loss account can not be said to reflect the correct measurement of the firm's financial position as they have no relation to the market value of assets or their replacement values. This idea is that transactions are recognized as cost, not subjective or arbitrary, as Cost Concept. Over time, the market value of tangible assets, such as land and buildings, is significantly different from the cost.

Values ​​changes or changes in value are usually ignored by accountants and their value remains on the balance in the historical cost. The principle of cost accounting is the value of fixed assets and their non-market value. According to them, the present values ​​themselves represent the cost of the organization.

The principle of cost is based on the principle of objectivity. Supporters of this method argue as long as users of financial statements have confidence in the statements, so no change is required. Conservatism

This concept emphasizes that profits should never be overexcited or expected. Traditionally, accounting follows the rule that "does not count on profits and provides all possible losses: for example, the closing stock should be valued at cost price or market price, whichever is lower, the above will result in a fall in the market price the "expected loss", but if the market price rises, it ignores the "expected profit."

Critics point out that excessive retention creates a secret reserve that the doctrine of disclosure, although conservatism (19659003) Accounting Equation

The dual concept can be described as "for all burdens and for credit." Each transaction should have the same amount of bilateral effect that resulted in an accounting equation that states that at any time any businessman (in money) to the owner's equity and to the ou tsider's liabilities. This may be expressed in the form of an equation: A-L = P


A is the entity's assets;

L an entity's liabilities (external assets); and

P for the claim of the holder (equity) refers to the entity

(The form of presentation of the AL = P equation is consistent with the legal interpretation of the financial position, therefore emphasizes that the equity claim is adequately balanced after the entrepreneur has .

Source by Anil Kumar Gupta

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