ACCOUNTING CONCEPT

Generally Accepted Accounting Principles:

Generally Accepted Accounting principles refer to the rules or guidelines adopted for recording
and reporting of business transactions in order to bring uniformity in the preparation and
presentation of financial statements. These principles are also referred to as concepts and
conventions. From the practicality view point, the various terms such as principles, postulates,
conventions modifying principles, assumptions, etc. have been used interchangeably and are
referred to as basic
accounting concepts.
❖ Basic Accounting Concepts:
The basic accounting concepts are referred to as the fundamental ideas or basic assumptions
underlying the theory and practice of financial accounting and are broad working rules for all
accounting activities and developed by the accounting profession. The important concepts are
discussed below:
[Link] Entity Concept: This concept assumes that business has distinct and separate entity
from its owners. Thus, for the purpose of accounting, business and its owners are to be treated as
two separate entities.
[Link] Measurement Concept: The concept of money measurement states that only those
transactions and happenings in an organization on, which can be expressed in terms of money
are to be recorded in the book of accounts. Also, the records of the transactions are to be kept not
in the physical units but in the monetary units.
[Link] Concern Concept: The concept of going concern assumes that a business firm would
continue to carry out its operations indefinitely (for a fairly long period of time) and would not
be liquidated in the near future.
[Link] Period Concept: Accounting period refers to the span of time at the end of which
the financial statements of an enterprise are prepared to know whether it has earned profits or
incurred losses during that period and what exactly is the position of its assets and liabilities, at
the end of that period.
[Link] Concept: The cost concept requires that all assets are recorded in the book of accounts at
their cost price, which includes cost of acquisition, transportation, installation and making the
asset ready for the use.
[Link] Aspect Concept: This concept states that every transaction has a dual or two-fold effect
on various accounts and should therefore be recorded at two places. The duality principle is
commonly expressed in terms of fundamental accounting equation, which is:
ASSETS= LIABILITIES + CAPITAL
[Link] Recognition (Realization) Concept: Revenue is the gross in-flow of cash arising from
the sale of goods and services by an enterprise and use by others of the enterprise resources
yielding interest royalties and dividends. The concept of revenue recognition requires that the
revenue for a business transaction should be considered realised when a legal right to receive it
arises.
[Link] Concept: The concept of matching emphasizes that expenses incurred in an
accounting period should be matched with revenues during that period. It follows from this that
the revenue and expenses incurred to earn this revenue must belong to the same accounting
period.
9. Full Disclosure Concept: This concept requires that all material and relevant facts concerning
financial performance of an enterprise must be fully and completely disclosed in the financial
statements and their accompanying footnotes.
10. Consistency Concept: This concepts states that accounting policies and practices followed
by enterprises should be uniform and consistent on the period of time so that results are
[Link] results when the same accounting principles are consistently being
applied by different enterprises for the period under comparison, or the same firm for a number
of periods.
[Link] Concept: This concept requires that business transactions should be recorded
in such a manner that profits are not overstated. All anticipated losses should be accounted for
but all unrealized gains should be ignored.
12. Materiality Concept: This concept states that accounting should focus on material facts. If the
item is likely to influence the decision of a reasonably prudent investor or creditor, it should be
regarded as material, and shown in the financial statements.
13. Objectivity Concept: The concept of objectivity requires that accounting transaction should
be recorded in an objective manner, free from the bias of accountants and others. This can be
possiblewhen each of the transaction is supported by verifiable documents or vouchers.
IF YOU WANT MORE EXPLANATION PLEASE HELP BOOK (Not WRITTEN this line )
❖ Systems of Accounting:
The systems of recording transactions in the book of accounts are generally classified into two
types,
Double entry system and Single-entry system.

1. Double entry system is based on the principle of ‘Dual Aspect’ which states that every
transaction
has two effects, viz. receiving of a benefit and giving of a benefit. Each transaction, therefore,
involves two or more accounts and is recorded at different places in the ledger.
Double entry system is a complete system as both the aspects of a transaction are recorded in the
book
of accounts. The system is accurate and more reliable as the possibilities of frauds and
misappropriations are minimised.
2. Single entry system is not a complete system of maintaining records of financial transactions.
It
does not record two-fold effect of each and every transaction. It maintains only cash and personal
accounts.

BASES OF ACCOUNTING
There are two bases of ascertaining profit or loss, namely 1 Cash Basis, and
(2) Accrual Basis.

1. Cash Basis of Accounting : Under this system of accounting

transactions are recorded in the books of accounts only on the receipt/
payment of cash. The income is calculated as the excess of actual cash
receipts (in respect of sale of goods, service, properties etc.) over actual
cash payments (regarding purchase of goods, expenses, rent, electricity,
salaries etc.)
Entry is not recorded when a payment or receipt merely due i.e.,
outstanding expenses, Accrued income are not treated. This method is
contrary to the matching principle.

2. Accrual Basis of Accounting: Under this system of accounting, revenue

and expenses are recorded when they are recognized i.e., Income is
recorded as Income when it is accrued (when transaction takes place)
irrespective of fact whether cash is received or not. Similarly, expenses are
recorded when they are incurred or become due and not when the cash is
paid for them.
Under this system, expenses such as outstanding expenses, prepaid
expenses, accrued income and received in advance are identified and taken
into account.

Under the companies’ amendments Act 2013, all companies are required to
maintain their accounts according to accrual basis of accounting.

Difference between accrual basis of accounting and cash basis of

accounting
 Basis Accrual Basis of Accounting Cash Basis of Accounting

1. Recording of Both cash and credit Only cash transactions are

transactions transactions are recorded recorded.

Profit or Loss is ascertained Correct profit/loss is not

2. Profit or Loss correctly due to complete ascertained because it records
record of transactions. only c a s h transactions

3. Distinction This method makes a This method does not make a

between Capital distinction between capital and distinction between capital and
and Revenue revenue items. revenue nature items.

This basis is recognized under This basis is not recognized

4. Legal position
the companies Act under the companies Act.

You will write more difference which is given in d k goel book

ACCOUNTING STANDARDS : CONCEPT AND OBJECTIONS

The accounting principles or GAAP in the form of concepts and conventions
have been developed to bring comparability and uniformity in the financial
statements. But GAAP also allow a large number of alternative treatments for
the same item. Different organizations may adopt different accounting
policies for the same transaction or an organization may follow different
accounting policies for the same item over different accounting periods. As a
result, the financial statements become inconsistence and incomparable.

So it was felt that certain minimum standards should be universally

applicable, so that the accounting statements have the qualitative
characteristics of reliability, relevance, understandability and comparability.

International Accounting Standard Committee (IASC) was set up in 1973.

(Now renamed as International financial Reporting Committee IFRC). The
Institute of Chartered Accountants of India (ICAI) and the Institute of Cost
and Works Accountants of India (ICWAI) are members of this committee. ICAI
set up the Accounting Standard Board (ASB) in 1977 to identify the areas in
which uniformity in accounting required. ASB prepares and submits a draft
accounting standard to the Council of ICAI. The Council of
ICAI issues the draft for the comments to the Govt., industry and
professionals etc. After due consideration on comments received, the Council
of ICAI notifies it for its use in financial statements.

Concept of Accounting Standards

Accounting standards are written statements, issued from time-
to-time by institutions of accounting professionals, specifying
uniform rules or practices for drawing the financial statements.

Objectives of Accounting Standards

[Link] standards are required to bring uniformity in accounting
practices and policies by proposing standard treatment in preparation of
financial statements.
[Link] improve reliability of the financial statement: Accounts prepared
by using accounting standards are reliable for various users, because these
standards create a sense of confidence among the users.
[Link] prevent frauds and manipulation by codifying the accounting
methods and practices.
[Link] Help Auditors: Accounting standards provide uniformity in accounting
practices, so it helps auditors to audit the books of accounts.
IFRS International Financial Reporting Standards
This term refers to the financial standard issued by International Accounting
standards Board (IASB). It is the process of improving the financial reporting
internationally to help participants in the various capital markets of the world
and Other Users.

IFRS Based financial Statements

Following financial statements are produced under IFRS:

1. Statement of financial position: The elements of this statement

are
(a) Assets (b) Liability (c) Equity
[Link] Income statement: The elements of this statement
are
(a) Revenue (b) Expense
3. Statement of changes in Equity
4. Statement of Cash flow
5. Notes and significant accounting policies
Main difference between IFRS and IAS (Indian Accounting
Standards)
1. IFRS are principle based while IAS are rule based.
2. IFRS are based on Fair Value while IAS are based on Historical Cost.