Acc0102. Accounting Concepts & Principles
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GAAP and accounting standards form the theory base of accounting and describe rules for preparing financial statements. Accounting conventions emerge from commonly used accounting principles and practices, though they do not need universal application. Key accounting concepts include the entity, money measurement, periodicity, accrual, matching, going concern, cost, and realization concepts. Accounting principles should be based on assumptions, simple to understand, consistently followed, reflect future predictions, and be informative for users.
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Acc0102. Accounting Concepts & Principles
- 1. CPTSuccessRevision Notes – Fundamentals of AccountingChapter 1. Accounting an IntroductionUnit 2: Accounting Concepts, Principles and Conventions
- 2. Chapter 1. Accounting an IntroductionUnit 2: Accounting Concepts, Principles and ConventionsGAAP means Generally accepted Accounting Principles. The term GAAP is utilized to describe rules developed for the preparation of the financial statements and is called concepts, conventions, principles etc. These GAAP’s are back bone of the accounting information system. GAAP’s and Accounting Standards together are known as the theory base of accounting.
- 3. Accounting conventions emerge out of accounting practices, commonly known as accounting principles, adopted by various organizations over a period of time. These conventions are derived by usage and practice. Accounting conventions need not have any universal application.©Revision Notes - Fundamentals of AccountingCPTSuccesswww.cptsuccess.com
- 4. Chapter 1. Accounting an IntroductionUnit 2: Accounting Concepts, Principles and ConventionsAccounting principles must satisfy following conditions:
- 5. should be based on real assumptions
- 6. must be simple, understandable and explanatory
- 7. must be followed consistently
- 8. should be able to reflect future predictions
- 9. should be informational for the users©Revision Notes - Fundamentals of AccountingCPTSuccesswww.cptsuccess.com
- 10. Chapter 1. Accounting an IntroductionUnit 2: Accounting Concepts, Principles and Conventions Widely accepted Accounting concepts are as follows:
- 11. Entity concept – business enterprise is a separate identity apart from its owner
- 12. Money measurement concept - only those transactions, which can be measured in terms of money are recorded.
- 13. Periodicity concept – this is also called concept of definite accounting period. As per this concept, accounts should be prepared after every period and not at the end of the life of the entity.
- 14. Accrual concept – the effects of transactions and other events are recognised on a mercantile basis i.e., when they occur (and not as cash or cash equivalent is recognised or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. ©Revision Notes - Fundamentals of AccountingCPTSuccesswww.cptsuccess.com
- 15. Chapter 1. Accounting an IntroductionUnit 2: Accounting Concepts, Principles and Conventions Widely accepted Accounting concepts are as follows:
- 16. Matching concept – all expenses which match with the revenue of that period should only be taken into consideration. In the financial statements of any organization, if any revenue is recognized then expenses related to earn that revenue should also be recognized.
- 17. Going concern concept – the financial statements are prepared on the assumption that an enterprise is a going concern and will continue in operation for the foreseeable future. It is assumed that the business has neither the intention nor the need to liquidate or curtail materially the scale of its operations.
- 18. Cost concept – the value of an asset is to be determined on the basis of historical cost i.e. acquisition cost. ©Revision Notes - Fundamentals of AccountingCPTSuccesswww.cptsuccess.com
- 19. Chapter 1. Accounting an IntroductionUnit 2: Accounting Concepts, Principles and Conventions Widely accepted Accounting concepts are as follows:
- 20. Realization concept – any change in value of an asset is to be recorded only when the business realises it.
- 21. Dual aspect concept – every transaction affects two or more accounts. There is a decrease/ increase in asset/ liability with simultaneous increase/ decrease in asset/ liability. Thus it gives the accounting equation. Equity + Liabilities = Assets
- 22. Conservatism concepts – do not anticipate income and provide for all losses. For this concept, there should be at least 3 qualitative characteristics of financial statements namely, Prudence, Neutrality and Faithful representation of alternative values.©Revision Notes - Fundamentals of AccountingCPTSuccesswww.cptsuccess.com
- 23. Chapter 1. Accounting an IntroductionUnit 2: Accounting Concepts, Principles and Conventions Widely accepted Accounting concepts are as follows:
- 24. Consistency concept – the accounting policies are followed consistently from one period to another; a change in accounting policy can happen in following circumstances only:
- 25. To bring the books of accounts in accordance with the issued Accounting standards
- 26. To comply with the provisions of the law
- 27. When under changed circumstances it is felt that new method will reflect more true and fair picture in the financial statement.
- 28. Materiality concept – this concept permits other concepts to be ignored if the effect is not considered material. This principle is an exception of full disclosure principle. ©Revision Notes - Fundamentals of AccountingCPTSuccesswww.cptsuccess.com
- 29. Chapter 1. Accounting an IntroductionUnit 2: Accounting Concepts, Principles and ConventionsFundamental Accounting Assumptions as per AS 1 are
- 30. Going concern
- 31. Consistency, and
- 32. Accrual
- 33. Qualitative characteristics of financial statements are Understandability, Relevance, Reliability, Comparability, Materiality, Faithful representation, Substance over form, Neutrality, Prudence, Completeness, and Full, fair and adequate disclosure. ©Revision Notes - Fundamentals of AccountingCPTSuccesswww.cptsuccess.com
- 34. CPTSuccess