MODEL ANSWER TO QUESTION ,DISCUSS THE MEANING,NEED OF VARIOUS CONCEPT AND CONVENTIONS

´  ACCOUNTING CONCEPTS AND CONVENTIONS
´  BUSINESS ACCOUNTING/ACCOUNTING FOR MGMT

Q. WHAT DO YOU MEAN BY ACCOUNTING CONCEPTS? WHAT IS THEIR SIGNIFICANCE? 2016

Q. WHY ACCOUNTING CONCEPTS AND CONVENTIONS ARE REQUIRED?

DISCUSS THE VARIOUS CONVENTIONS OF ACCOUNTING?

´  ANSWER

´  IN ORDER TO MAKE THE FINANCIAL STATEMENT MORE MEANINGFUL,ACCEPTABLE,COMPARABLE,CONSISTENT,RELIABLE AND UNBIASED IT IS NECESSARY THAT A UNIFORM SYSTEM OF ACCOUNTING BASED ON GENERALLY ACCEPTED ACCOUNTING PRINCIPLES(GAAP) IS FOLLOWED

´  AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANT HAS DEFINED THE PRINCIPLES A GENERAL LAW OR RULE,ADOPTED OR PROFESSED AS A GUIDE TO ACTION,A SETTLED GROUND OR THE BASIS OF CONDUCT OR PRACTICE.

´  CARE SHOULD BE TAKEN TO MAKE IT CLEAR THAT AS APPLIED TO ACCOUNTING PRACTICES,THE WORD PRINCIPLE DOES NOT MEAN A RULE FOR WHICH THERE CAN BE NO DEVIATIONS

´  ESSENTIAL FEATURES OF ACCOUNTING PRINCIPLES

I.        MAN MADE

II.        OBJECTIVITY

III.        RELEVANCE

IV.        FEASIBILITY

´  ACCOUNTING CONCEPTS

CONCEPT IS THE ASSUMPTION WHICH IS ACCEPTED AND FOLLOWED BY ALL. ACCOUNTING CONCEPTS PROVIDE THE CONCEPTUAL GUIDELINES FOR APPLICATION IN THE FINANCIAL ACCOUNTING PROCESS.

ACCOUNTING CONVENTIONS IMPLIES THE CUSTOMS OR PRACTICE THAT ARE WIDELY ACCEPTED BY THE ACCOUNTING BODIES AND ARE ADOPTED BY THE FIRMS TO WORK AS A GUIDE IN THE PREPARARTIONOF FINAL ACCOUNT.

´  WHY???????

´  THE OBJECTIVE BEHIND PREPRATION OF FINANCIAL ACCOUNT IS TO PRESENT A TRUE AND FAIR PICTURE OF THE BUSINESS.

´  THE TRUE AND FAIR VIEW IS APPLIED IN ENSURING AND ASSESSING WHETHER ACCOUNTS DO INDEED PRESENT THE BUSINESS ACTIVITIES IN ACCURATE MANNER.

´  TO SUPPORT THE APPLICATION OF THE TRUE AND FAIR VIEW, ACCOUNTING HAS ADOPTED CERTAIN CONCEPTS AND CONVENTIONS WHICH HELP TO ENSURE THAT ACCOUNTING INFORMATION IS PRESENTED ACCURATELY AND CONSISTENTLY.

´   BUSINESS ENTITY CONCEPT

´  FOR THE PURPOSE OF ACCOUNTING, THE BUSINESS AND OWNER TREATED AS SEPARATE ENTITIES IN EVERY BUSINESS. ONLY TRANSACTION RELATED TO BUSINESS ARE RECORDED AND PERSONAL TRANSACTIONS ARE NOT TAKEN INTO ACCOUNT. IF THE OWNER WITHDRAWS MONEY FOR HIS PERSONAL EXPENSES IT WILL BE TREATED AS DRAWINGS AND IF HE BRINGS MONEY OR ANY THING THAT IS TREATED AS CAPITAL THAT IS THE LIABILITY FOR BUSINESS

´  GOING CONCERN CONCEPT

´  IT IS ASSUMED THAT BUSINESS WILL CONTINUE FOR A LONG TIME AND WILL NOT CLOSE IN NEAR FUTURE.

´  FIXED ASSETS ARE RECORDED AT THE ORIGINAL COST AND DEPRECIATION IS PROVIDED WITH OUT TAKING INTO THE CONSIDERATION THE CURRENT MARKET VALUE OF THE ASSET. BECAUSE FIXED ASSETS ARE PURCHASED FOR RUNNING THE BUSINESS NOT FOR SALE. VALUATION OF ASSETS OF A BUSINESS E

´  MONEY MEASUREMENT CONCEPT

´  TRANSACTIONS WHICH CAN BE EXPRESSED IN TERMS OF MONEY ARE RECORDED IN TERMS OF MONEY ARE RECORDED IN THE BOOKS OF ACCOUNT. THE RECORDS OF TRANSACTIONS ARE NOT TO BE KEPT IN THE PHYSICAL UNITS BUT IN MONETARY UNIT.

´  IT IS USELESS WHEN WE SAY THAT WE HAVE TWENTY TABLES AND TEN CHAIR. WHEN WE SAY WE HAVE FURNITURE WORTH RS 90,000 THEN IT MAKES SENSE. ONLY THOSE TRANSACTIONS WHICH CAN BE EXPRESSED IN MONETARY TERMS THEN THEY WILL BE RECORDED IN BOOKS OF ACCOUNT.

´  ACCOUNTING PERIOD CONCEPT

´  ECONOMIC LIFE OF THE BUSINESS IS TO BE DIVIDED INTO PERIODIC INTERVALS KNOWN AS ACCOUNTING PERIODS TO STUDY THE RESULTS SHOWN BY THE BUSINESS AFTER A TIME PERIOD. IT MAY BE CALENDAR YEAR OR FINANCIAL YEAR.

´  COST CONCEPT

´  THIS CONCEPT IS BASED AN IDEA THAT :

•                       THE ASSETS OR RESOURCES OF THE BUSINESS ARE RECORDED IN THE BOOKS AT THE PRICE PAID TO ACQUIRE THEM I.E., AT THE COST PRICE.

•                       THIS COST BECOMES THE BASIS FOR THE ACCOUNTING OF THE ASSETS DURING THE SUBSEQUENT PERIODS.

THIS CONCEPT HAS A LIMITATION THAT BOOK VALUE OF THE ASSETS AS RECORDED MAY NOT REFLECT THE TRUE WORTH OF THE ASSETS

LIKE ABC LTD HAS PURCHASED THE ASSET WORTH RS 10,000.IT WILL BE RECORDE AT THAT COST,NEXT YEAR IT WILL BE SHOWN COST-DEPRECIATION NOT ON THE BASIS OF MARKET PRICE..

´  ACCRUAL CONCEPT

´  IT IMPLIES THAT REVENUE IS RECOGNIZED WHEN IT IS REALIZED IRRESPECTIVE OF WHETHER CASH IS RECEIVED OR NOT.  SIMILARLY, EXPENSES ARE RECOGNIZED IN THE PERIOD IN WHICH THEY ACCRUE IRRESPECTIVE OF WHETHER CASH IS PAID OR NOT.

´  REVENUE AND COSTS ARE TO BE RECOGNIZED AS THEY ARE EARNED OR INCURRED NOT MONEY RECEIVED AND PAID.

´  AS A SOLD GOODS WORTH RS 40,000 AND 20000 IS RECEIVED IMMEDIATE AND BALANCE OF 20,000 IN NEXT YEAR. AS PER ACCOUNTING A’S REVENUE IS 40,000 AND NOT 20,0000

´  MATCHING CONCEPT

´  THIS CONCEPT IS BASED ON ACCOUNTING PERIOD CONCEPT WHICH REQUIRES THAT THERE SHOULD BE A PERIODIC MATCHING OF COSTS INCURRED AND REVENUE EARNED DURING THE ACCOUNTING PERIOD.

´  THE PURPOSE IS TO ASCERTAIN PROFIT PERIODICALLY

´  THIS CONCEPT FIXES THE TIME FRAME FOR WHICH THE PERFORMANCE IS TO BE MEASURED. IT MAY BE CALENDAR YEAR STARTING FROM FIRST JAN TO 31 ST DECEMBER. OR IT MAY BE FINANCIAL YEAR FROM 1 ST APRIL TO 31 ST MARCH.

´  REALIZATION CONCEPT

´  ACCORDING TO THIS CONCEPT, THE REVENUE SHOULD BE CONSIDERED ONLY WHEN IT IS REALIZED. THE REVENUE IN THE BUSINESS IS DEEMED TO HAVE BEEN REALIZED WHEN THE PROPERTY IN THE GOODS PASSES TO THE BUYER VIZ., SALES ARE AFFECTED AND THE BUYER BECOMES LEGALLY LIABLE TO PAY TO THE SELLER.

´  EXAMPLE:-

•                       A PLACES AN ORDER WITH B FOR THE SUPPLY OF CERTAIN GOODS ON 20 TH JUNE 2016

•                       A CONTRACT WITH B AND B SUPPLIES THE GOODS TO A ON 25 TH AUG,2016

•                       A MAKES PAYMENT TO B ON 30 TH DEC 2016

•                       REVENUE IS RECOGNISED ON 25 TH AUG 2016.

´  DUAL CONCEPT

DUAL MEANS TWO. EVERY TRANSACTION HAS TWO ASPECTS ONE IS DR AND SECOND IS CREDIT.

CAPITAL PLUS LIABILITES=ASSETS

´  ACCOUNTING CONVENTIONS

´  ACCOUNTING CONVENTIONS MEANS CUSTOMS OR TRADITIONS ESTABLISHED AFTER A LONG USAGE TO GUIDE THE PREPARATION AND PRESENTATION OF ACCOUNTING STATEMENTS. ACCOUNTING CONVENTIONS ARE MORE FLEXIBLE AS COMPARED TO ACCOUNTING CONCEPTS. THE FOLLOWING ARE THE IMPORTANT ACCOUNTING CONVENTIONS:-

1. CONVENTION OF CONSERVATION
2. CONVENTION OF CONSISTENCY
3. CONVENTION OF MATERIALITY
4. CONVENTION OF FULL DISCLOSURE
5. CONVENTION OF OBJECTIVITY

CONVENTION OF CONSERVATISM

´  IT MEANS THE ACCOUNTANTS SHOULD FOLLOW THE RULE OF “ANTICIPATE NO PROFITS BUT PROVIDE FOR ALL PROBABLE LOSSES. THIS CONVENTIONS REQUIRES THAT PROFIT SHOULD NEITHER BE OVERSTATED NOR ANTICIPATED. ACCOUNTANT SHOULD FOLLOW THE POLICY OF PLAYING SAFE.

´  WHEN WE ANTICIPATE OUT OF 10%  OF DEBTORS OUT OF CREDIT SALE MAY NOT PAY US WE SHOULD MAKE A PROVISION FOR BAD DEBT BUT WHEN WE ESTIMATE THAT PARTICULAR TRANSACTION IF DONE WILL GIVE US A PROFIT OF 10,000 AND THEN IT SHOULD BE RECORDED WHEN WE ACTUALLY MAKE THE PROFIT.

´  CONVENTION OF CONSISTENCY

´  THIS CONVENTION EMPHASIZES THE USE OF UNIFORM ACCOUNTING PRACTICES FROM ONE PERIOD TO ANOTHER. IT MEANS THAT SAME ACCOUNTING METHODS WILL BE USED FOR SIMILAR ITEMS OVER A PERIOD OF TIME. ONLY WHEN THE ACCOUNTING PRACTICES ARE FOLLOWED CONSISTENTLY FROM YEAR TO YEAR, THE RESULTS DISCLOSED IN THE FINANCIAL STATEMENTS WILL BE COMPARABLE.

´  LIKE IN CASE OF DEPRECIATION IF WE FOLLOWING STRAIGHT LINE METHOD BUT NOW WE SWITCHING TO WRITTEN DOWN VALUE METHOD THEN THERE SHOULD BE SOME LOGIC BEHIND IT.

´  CONVENTION OF MATERIALITY

´  ONLY MATERIAL SIGNIFICANT DETAILS ARE TO BE DISCLOSED AND INSIGNIFICANT DETAILS ARE TO BE IGNORED. MATERIALITY IS HOWEVER A SUBJECTIVE CONCEPT.MOREOVER AN ITEM MAY BE MATERIAL FOR ONE PURPOSE OR IMMATERIAL FOR ANOTHER.

´  CONVENTION OF FULL DISCLOSURE

´  IT REQUIRES THAT FINANCIAL STATEMENT SHOULD REVEAL ALL THE RELEVANT AND RELIABLE INFORMATION FULLY AND FAIRY. ACCOUNTANT SHOULD NOT CONCEAL ANY FACTS WHICH THEY HAVE TO REPRESENT.

´  IT SHOULD GIVE A TRUE AND FAIR  VIEW OF THE FINANCIAL POSITION OF THE ORGANIZATION.

´  CONVENTION OF OBJECTIVITY

´  EACH RECORDED TRANSACTION IN THE BOOKS OF ACCOUNT HAVE SUFFICIENT EVIDENCE TO SUPPORT IT. THE TRANSACTIONS ARE TO BE RECORDED ON THE BASIS OF VOUCHERS,RECEIPTS AND MEMO ETC.