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Accounting principle can be classified into two categories Accounting concepts Accounting convention Accounting Concepts They have generally accepted the set of accounting rules based on which transaction are recorded and financial statement are prepared.
This concept provides the foundation for accounting process and enables the user to understand the financial statement of the enterprise in a better way.
May be considered as postulates i. Accounting convention are the outcome of accounting principle or practices or practices being followed by enterprises over a period of time. A convention may undergo a change with the time to bring about change in the quality of accounting information.
Denotes circumstances which guide the accountants while preparing the accounting statement. Accounting Concepts Business entity this concept implies that a business unit is separated and distinct from the person who supply capital to it.
Irrespective of the form of organization means business unit have its own individuality. The accounting equation itself owns the assets and in turns owes to the various claimants. In accounting, we distinguish between the business and its proprietors.
Business is assumed to have distinct entity ie. Existence other than the existence of proprietor and other business units. As an accountant, we concerned with the business, not the business man. We have to record business transaction form firm point of view and never from the viewpoint of proprietors.
In accounting, we identify and record only those business transaction which is financial in nature. A business unit is deemed to be going concern and not a gone concern. It will continue to operate in future. A fundamental concept of accounting closely related to the going concern concept is that asset is recorded in the books at the price paid to acquire it and that this cost is the basis for all subsequent accounting for the assets.
The concept is called historical because the balance of assets and liabilities is carried forward from year to year at its acquisition cost irrespective of increase or decrease in market value of the asset. Historical approach of presenting assets and liabilities has a clear advantage over other approaches to valuation because it is reliable verified a definite.
The use of historical cost as the basis provides verifiable and objective accounting information. According to this concept every financial transaction involves a two-fold aspect a yielding of benefits 2 the giving of benefits.
Every business transaction has a double effect. There are two sides of every transaction. This is evident when we study the accounting term ie assets, capital, nd liabilities. Final accounts are prepared on a periodic basis as all the parties such as owner, investor, manager, bank, lender are interested in final accounts of the firm.
If the firm was started with the capital of Rs 50, and at the end of its life the capital was Rs we can say that firm earned a profit of Rsduring its life.
In this way, business as a going entity will continue indefinitely and we can have to wait for a very long period to estimate the financial result of business. The matching concept is an accounting practice whereby expenses are recognized in the same accounting period as the related revenues are recognized.
The whole business structure is based upon the desire to earn the profit. It has been the duty accountant all over the world to evolve principle of calculation exact and accurate profit.
The result of these efforts was the introduction of the principle of matching cost and revenue. According to this concept, income can be ascertained by matching revenue of the business with its costs.
Sales of Rs is revenue Net profit 8. According to this concept revenue is only realized when the goods or service related to service is delivered or rendered. This concept ensures that all accounting must be based on objective evidence ie.
Only then the transaction can be verified by the auditors Accounting Convention Convention of consistency It stated that accounting principle and methods should remain consistent from one year to another but it allows a firm to change the accounting method according to the changed circumstances of the business.
According to this convention, the accounting practices should remain unchanged from one period to another. It requires that working rules once chosen should not be changed arbitrarily and without notice of the effect of the change to those who use the accounts.Rules of accounting that should be followed in preparation of all accounts and financial statements.
The four fundamental concepts are (1) Accruals concept: revenue and expenses are recorded when they occur and not when the cash is received or paid out; (2) Consistency concept: once an accounting method has been chosen, that method should be used unless there is a sound reason to do otherwise;.
l explain the term accounting concept; l explain the meaning and significance of various accounting concepts: Business Entity, Money Measurement, Going Concern, Accounting Period, Cost Concept, Duality Aspect concept, Realisation Concept, Accrual Concept and Matching Concept.
MEANING AND BUSINESS ENTITY CONCEPT Let us take an example. Accounting Conventions and Standards ACCOUNTANCY In the previous lesson, you have studied the accounting concepts like business entity, money measurement, going concern, accounting period, cost, duality, realisation, accrual and matching.
These concepts or assumptions l explain the meaning of accounting convention;. Accounting concepts are postulates, assumptions or conditions upon which accounting is based. Accounting - Concepts and Conventions.
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The conclusions drawn on the basis of irrelevant information would be. Accounting Conventions: 4 Accounting Conventions. This convention plays its role particularly when alternative accounting practice is equally acceptable.
Moreover, consistency serves to eliminate personal bias.
Top 4 Types of Accounting Conventions | Accounting Principles ; Limitations of Accounting (8 Limitations). This convention plays its role particularly when alternative accounting practice is equally acceptable.
Moreover, consistency serves to eliminate personal bias. But if a change becomes desirable, the change and its effect should be clearly stated in the financial statements.