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Introduction to F'inancial Accounts (F. Y.BMSs, , Sem.-1), , 22, , 3, , ACCOUNTING PRINCIPLES, , (CONCEPTS AND, CONVENTIONS), , Learning Objectives, After studyving this chapter, you should be, , able to understand:, , Meaning of GAAP, Basic concepts in Accounting, , Basic comventions in Accounting, , Synopsis, Introduction, 3., , 5., 6., 6., , Meaning and Importance, Features of Accounting Principles, , Needfor Accounting Principles, , Importance of Accounting Principles, Kinds, 6.1, , of Accounting Principles, , Accounting Concepts or Assumptions, , 6.2 Accounting Comventions, 7., 7, , Impact of Concepts and Conventions on, , 8., , Excercises, , Net, , Profit and Net, , Worth

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(Comepts amdCoventions), Arounting riniyies, INTRODUCTION, , tn the last wo chapters, you have learnt about the concept of Book-Keeping and Acce, , and various terminologies. This chapter proposes to study various concepts and c, , tac, , ounting. After studying these concepts and conventions, you will be able to understand, manner., acoounting in a proper, MEANING AND IMPORTANCE, , 2., , The dictionary meaning of the term Principle' is a "fundamerntal truth implying uniforrmity of an, , aeptance everywhere." However, when applied to accounting, it gives different meanings in, different contexts. It is rarely used as a fundamental accounting truth. Accounting principle is a, , Tuiding infuence or an accepted nule of action or conduct. In other words, accounting principles, are those rules of action or conduct, which are adopted by the accountants universally in recording, accounting transactions. Different professional bodies like Australian Society of Accountants, The, Institute of Chartered Accountants in Australia, The Institute of Chartered Accountants in England, , and Wales. The American, , Institute of Certified Public Accountants etc. have made, , recommendations on accounting principles in the recent years., , Accounting principles have been developed over the years from experience, reason, usage, and necessity. They are judged on their general acceptability rather than universal acceptability to, , the users of financial statements. Hence, they are called as Generally Accepted Accounting, Principles. These generally accepted accounting principles have common qualities. These principles, are, , inter-related through these qualities or common merits., The inter-relationship may be shown as given below:, , Conventions, Doctrines, , Principles, Rules, Fig. 3.1, As a matter of fact, all the rules, regulations, concepts, principles, postulates, doctrines and, conventions are in the same line. The upper most position of the line is the area of common, customs or the normal rules followed by the people in their day to day accounting work. These are, , called as concepts and conventions., , Accounting principles can be broadly classified into two categories:, , A. Accounting Concepts, B. Accounting Conventions., 3., , FEATURES OF ACCOUNTING PRINCIPLES, , the features of Accounting Principles, , Following, 1., , Uniform set, , These, , are, , the uniform set of rules and regulations developed, , to ensure, , uniformity in, , accounting., 2., , Man made, Accounting principles, , are, , manmade., , laboratory tested. Therefore, they, mathematics., 3., , They, , derived from past experience. They are not, and, like the principles of physics, chemistry, , are, , are not exact, , Not Static, Accounting principles, , are not, , static., , They are, , gOvemment policies and business practices., , bound, , to, , change according, , to, , the changes in

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Acev, Financlal, , Iniroductlon, , to, , and, o, , r, , e, , l, , e, , v, , a, , n, , c, , e, , b, , j, , e, , c, , t, , i, , v, , i, , t, , y, , ,, , on, depend, , 4., , principles, , Conditional acceptance, accounting, , General acceptance, , basis of, , a c c o u n t i n g, , for, , Best possible suggestions, , Ccounting principles, , s u g g e s t i o n s, , the best, , are, , entered into a state of liqui, , 4., , the, , prepared, , feasibility, 5., , on, , Othe, , NEED FOR, , ACCOUNTING, , The basic objective «, , possible, , ion., , It is a s, , this, , per, , ass, , and, , figures., igure, , about, , PRINCIPLES, c, , u, , the, , on, s, , t, , o, , m, , e, , r, , s, , facts, , and figures, , f, , o, , r, , m, , a, , may, , vary, , In, , to, , order, , i, , o, , n, , is, to, , remove, , on, , accountants,, , bias of, , t, , fac, b a s i s of acts, , from, , s t a t e m e n t s, , These, , n, , a c c o u n t a n t, , prepared, , ,, , are, , Statements., , ese, , i, , 1his, , etc., , employees, , convey, , ning, bankers,, suppliers,, , stakeholders viz Shareholders,, made available through financial, and figures compiled by the Accoun, , the, , i n f o r m a t i o n, , is to, , the, , to all, enterprise, , the, , enterprises, , the, , different, , practices., , of, and, to difference of opinion, due, financial, is not, sound, ecountant, usedfor, to p r e p a r e, f, i, n, a, n, c, i, a, l, a, r, e, problems, it becomes essential, of, These, basis of uniform accounting principles., fair, guidelines,, Unless there are uniform accounting, tet., principles is, a r e for the, poSSible. Hence, the need of accounting, PRINCIPLES, financial, to, n o need, 5. IMPORTANCE OF ACCoUNTING, Therefore,, would be, 'persons., there, statemen, ts, many, owned, nts, person,, by, siness organisation is, financial, one, personal, , accounting, , s t a t e m e n t s, , s, , t, , a, , t, , e, , m, , e, , n, , t, , s, , guidelines, , presentation, , statements, , to, , However,, , statementsa, ppliers,, Ifthe financial, preparation, offinancial:, for, follow a common:framework, Bankers, suppl, for decision-making., , the, , owners., , statements., , are useful for many persons, Scholars, prospective investorS, , Common, , ectal, ne, , practice, , 5anS, , and, , framework, , for, , for, financial statements, , use, , for, , presentation, , principles, which, , union leaders,, , is, Hence, it, , decision-making., , statements., , There, , has, , lenders,, , necessary, , to be an, some, , are, of financial, statements. There, financial, the, in, Concepis, information, of, financial statements., prepare, , preparation, , are necessary, , are, , to, , important due to the following reasons:, statements., 1. Ensure uniformity in presentation offinancial, stakeholders., information to the, based are, 2. Serve the purpose of providing proper, statements are, financial, which, on, that, assumptions, stakeholders believe, , the, 3 All, valid and appropriate., 4., , 6., , 5., , Make financial statements reliable., Provide a basis for measurement that is, , 6., , Objectivity is sought in financial statements., , generally acceptable., , KINDS OF ACCOUNTING PRINCIPLES, , Accounting principles are classified into two categories as given, , below:, , 6.1 Accounting Concepts or Assumptions, , In order to make accounting language to convey the same meaning to all the people most of, , the accountants agreed on the number of concepts followed for preparation of financial statements., , These concepts provide a foundation to the accounting process. No organisation can prepare its, financial statements without considering these concepts. These concepts guide the accountant as to, , how to record and report the transactions., 6.1.1, , Entity, , For accounting purposes the 'business' is treated as a separate entity from the proprietor (s)., Business unit must have a separate set of books. It may sound to be absurd that one can sell goods, to himself, but all transactions are recorded in the books of the business as per this point of view., , The proprietor is treated as a creditor. This concept helps in keeping private afairs of the proprietor, awayfrom the business affairs. Thus if a proprietor invests 1,00,000/-in the business, it is deemed, that the proprietor has given 1,00,000/- to the 'business' and it is shown as a liability' in the books, (because business has to ultimately repay it to the proprietor)., if the, proprietor withdraws 7 10,000/- from the business, it is charged to him. Capital Similarly,, is treated as a, of the business., , liability. It is assumed that the proprietor has borrowed from busines., This concept is applicable to all forms of business, organisations. Although in the eyes of law a, sole trader and his business or the partners and their business are, one and the same, for, accounting, purposes they are regarded as separate entities. It is the 'business' with which we, are concerned., Even schools, colleges,, universities, Government, Govt. companies are, considered as separate entities. Accordingly, liabilities are theundertakings,, claims on the assets of a business unit.

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Accounting Principles (Comepts amd Coventions, , Out of the total iabilities, extemal liabilities havea primary claim on the asets. Internai liabilities, have a residual claim. This concept is accepted all over the world by the accountants, , Money Measurement Concept, 6.1.2, In accounting. everything is recorded in terms of money. Events or transactions, which cannot, be expressed in tems of money, are not recorded in the books of accounts, even if they are very, important or usefiul for the business. Purchase and sale of goods. payment of experises and receipt, of income are monetary transactions, which find place in accounting. Death of an executive, resignation of a manager are the events, which cannot be expressed in money., , Going concern concept (Continuity of activity), 6.1.3, It is assumed that the business concen will continue for a fairly long time, unless and until, umption, that the accountant does not take into account the forced sale values of assets while, valuing them. Similarly, depreciation on assets is provided on the basis of expected lives ot the, , assets rather than on their market values., Since the concern is to be kept continuously alive for a long period of time. financial and, , accounting policies are directed towards maintaining such continuity of activity., Transactions are recorded in the books of accounts on the assumption that a business, organisation is a continuing organisation. For example a machinery is purchased which has a life of, 10 years, the cost is spread over next 10 years for determination of proft or loss. Full cost of the, , machine is not treated as an expense. External parties enter into long term contract because o, , going concern. Companies raise crores of rupees from the market on account of issue of shares and, , debentures Classification of assets would be dificult to justiífy without this concept. Bankers give, long term loans to companies to finance their projects. Suppliers grant credit due to continuity of, business. Due to continuity concept, costs are distinguished as expired and unexpired costs. Expired, cost recognise expenses. Unexpired cost recognised as assets to be shown in Balance sheet., , 6.1.4, , Accounting period concept, , A business organisation is a going concern. It has continuous life. The correct results cannot be, till the, ascertained unless the business is closed down. The proprietor cannot wait indefinitely, divided, is, an, of, organisation, closure of business to know the financial results. Hence, the life span, It is also, into the periods of 12 months which is known as accounting year or accounting period., , known as fiscal or financial year. It is essential to measure financial health or an organisation, Hence. financial results are, to enable the stakeholders to take right decision., , periodically, , ascertained every year. All the organisations therefore, prepare financial statements every year., , period, Even the Companies Act and Taxation Laws have recognised accounting, , as one, , accounting year., , the profitability and financial status of an, Accounting period assumption enables to compare, basis of, future plans of progress can be prepared on the, organisation with another organisation. The, accounting period concept., their accounting year. Income tax Act also provides, Companies have to adopt financial year as, , that the companies shall adopt financial year as an accounting year., , Cost Concept, 6.1.5, realisable value, the replacement value, This concept does ndt recognise the, , or, , the real worth, , of an asset., Thus, as per cost concept:, , it i.e. at its cost, and, recorded at the price paid to acquire, a) an asset is ordinarily, asset., the, accounting for, b) this cost is the basis for all subsequent, at, 1,00,000/ it is recorded in the books, for, For example, if a plot of land is purchased, 2,00,000/accounts is, value at the time of preparation of tinal, 1,00,000/- and even if its market, date does not, a, on, sheet, particular, considered. Thus the balance, be, it, not, 60,000/- will, or, asset could be sold for., that, ordinarily indicate what the, cost. It only means, that the asset will always be shown at, , The, , not mean, cost concept does, , cost, , recorded at, for the asset. Thus the assets, accounting, subsequent, all, for, basis, the, These assets, Cost becomes, be reduced by the process of depreciation., systematically, (and sold as, at the time of purchase may, have been fully depreciated, when, sheet, they, balance, the, it cannot be, ultimately disappear from, been paid to acquire an asset,, has, if, that, nothing, The cost concept also implies, , SCrap)., , of accounts., Shown as an asset in the books, A/c. (Sem. - 1), 3/F.Y.B.M.S. - Intro. to Fin., -

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Financial Accounts (F. Y.BMS. Sem., -, , Introduction to, , P'r'*, Lost, , of financial statements,, , brings objectivity in the preparation and presentationon objective evidence anbased, the figures shown in the accounting records should be, , concept, , implhes that, not on the subjective views of a person., , 6.1.6, , Dual Aspect, , has, business, basic concept of accounting. As per this concept, every, For, value., example,, same, and giving of a benefit for, eect. 1.e. receiving of a benefit, two, aspects of the transaction: Assethere are, Manonar starts business with cash 1,00,000/1,00,000/- and on the other hano, and 'Capital Account. The business gets asset (cash) of 7, in the form of a, ACCOunt', can be expressed, tne business owes, 1,00,000/- to Manohar as his capital. This, transaction, , his is the, , equation as follows:, , =, , Capital (Equity), 1,00,000/lf the business increases, , the, , assets, , the equationwould be, , 30,000, , Cash (Asset), , 71,00,000/, , Equities (liabilities), Capital +Creditor + Loan, , on credit and borrowin, by purchase of building 50,000/-, , :, , Assets, , =Cash + Building, , 1.00,000 + 50,000 + 30,000, , 1:30,000 + 50,000, , Thus, the total assets are equal to total liabilities., Double entry of each, which is known as double entry., fold, two, has, aspects, transaction, Every, Hence the account receiving benefit is, , of accounts., every transaction is made in the books, It is, This system is called as Double Entry System., credited., aebited and the account giving benefit is, concept., of, equivalence concept". It is the outcome entity, also, as, , and, , "Accounting, Realisation Concept / Revenue Recognition Concept, accounted for only, to this concept profit should be, , known, , 6.1.7, , According, services are, Revenue is recognised only when sale is effected or the, , when it is, , actually realised., , rendered. Sale is considered to, , he is legaly liable to pay. However, in, the property in goods passes to the buyer and, essential. Even credit sale results in realisation as it, order to recognise revenue, receipt of cash is not, However, there are certain exceptions to the, Creates a definite asset called 'Account Receivable'., hire purchase etc. Similarly incomes like commission,, concept: like in case of contract accounts,, Account on accrual basis though they may not be, interest, rent etc. are shown in Profit and Loss, be made when, , realised in cash on the date of preparing accounts., or receipt of an order for, It should be noted that contract to sell goods or to render services, as revenue recognised or earned unless, Supply of goods or for rendering services cannot be treated, , the goods are actually supplied or the services are actually performed., , Further,, , should be noted that revenue earned during the accounting year is not equal to, , cash received. It is quite possible that cash might not have been received for revenue earned during, , the year, , 6.1.8, , Matching Concept, , This concept is very important for determination of profit of loss correctly according to this, concept, the profit of the business is calculated by matching total revenue earned during the year, , with total expenses incurred during the same period. The difference berween the two represents, profit or loss, Excess of revenue over expenses is profit. Excess of expenses over revenue is a loss., Following points should be considered while matching cost with revenue:, ) Any expenses payable for the period should be considered., ) Any prepaid expenses should be deducted from expenses paid., i) Cost of goods remaining unsold at the end of the year must be carried over to the next, year., , iv) Income receivable should be added to the revenue., v)Income received in advance should be deducted from the revenue., vi) Only revenue expenses and incomes should be considered., , It should be remembered that matching principles link revenues with their relevant expenses, for determination of profit or loss., As per this concept cost incurred to acquire fixed asset is dividend into two parts ie expired, cost and unexpired cost. The expired cost i.e. depreciation is treated as an expense which has, , helped to produce revenue of the said year.

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Accounting l'riniplex (omepts, , nd, , Unexpircd, , recognised as, , Accrual Concept, , 6.1.9, , (mventions), , costs are those, asset which is, , The accrual system is, , costs which holp, , shown, a, , in the, , 10, , Balance sheet, , produce, as an, , revenue, , aset, , in, , fture,, , c h cBI, , method, , revenuc and expense are identified ith, periods of time ike a month, half year orwherelby, spen.ifv, a year. It, particular accounting period, whether they are implies recording of revenues ánd per¥, of, reccived/ paid in cash or not. Under (Ash, accounting. tne revenues and, f, expenses are recorded only if they are actually received / systen, in, the, cash, irrespective of, accounting period to which they belong. But under accrual paid, nethod, the, revenues and expenses relating to that, particular accounting period only are considered., Accrual concept distinguishes, right to receive cash and actual receipt ot, obligation to pay cash and the actualbetween, casn a d t e, payment of cash on account of, an, , various incomes and, exper%., a legal right to, though, same way an tem, reCeve, ev, of expenses is treated as, tor wnicn, there is a legal obligation to pay even, expenses, cash might not have been, received on account of income, it shouldthough, paid. If any advance 13, not be treated as, incorne, it, earned. If payment is rnade n, advance should not be treated as, expenses, incurred., This, is, concept, financial statements., very useful for preparation of, From this concept of, accounting, one chief, 'revenue' items. Any increase in the Owner's problem arises viz., the segregation of capital and, Equity resulting from, Hence,, , item of revenue will be, treated, cash is not received. In the, , as, , revenue for, , which there is, , business, is called, revenue' and any decrease is called 'expense'., Therefore, excess of revenues overoperations, is called, Income' and if the expenses exceed revenues, expenses, it is Loss., 6.1.10 Objective evidence concept, It implies that every business record, must be supported, by proper documentary evidence. This, documentary evidence is called as a, , voucher. No, is made in the books of accounts, unless, proper voucher. For example, receipts, entry, bills,, cash, invoices,, memos, are, vouchers., Each, voucher contains details of the transaction. The, documents, the, entries, evidencing, should, be, objective and capable of verification by the auditors and such other, authorities. The, there is, , a, , documentary, evidence must be free from personal bias to prove its, worthiness and dependability. Then, only the financial statement will represent true state ofreliability,, affairs of the, , 6.2 Accounting Conventions, An accounting convention, may be defined as, , organisation., , a custom or, generally accepted practice which is, adopted either by general agreement or common consent among, accountants., , Difference between concepts and conventions:, , Following is the difierence between concepts and conventions:, 1., , Concepts, , are, , or usage., , 2., , In, , established by law whereas conventions are, guidelines based upon, , customs, , adoption concepts, there is no role of personal judgment where as conventions, adoption is affected by personal Judgment., Accounting concepts are adopted in different enterprises to bring uniformity. There, cannot be uniformity in adoption of, accounting conventions by different enterprises., of, , Concepts are abstract idea or understanding which goverm the accounting records., , Accounting conventions are not abstract ideas. But they provide guidance in preparation, of financial statements., , 5., , Concepts are the basis of accounting theory. Conventions are the common consent in, , accounting., 6.2.1, Full Disclosure, This means that the accounts must be honestly prepared and they must disclose all material, information. The accounting reports should disclose full and fair information to the, , proprietors,, , creditors, investors and others. This convention is specially significant in case of a big business like, , Joint Stock Company where there is a divorce between the owners and the managers. Therefore,, The Indian Companies Act, 1956 not only requires that the accounts of the company must give a, true and fair view of the state of affairs of the company but also it has prescribed the contents and, , forms of Profit and Loss Account and Balance Sheet., , However, it does not mean that all information or information of any kind is to be included in, accounting statements. The term 'disclosure' only implies that there must be a suficient disclosure of, , information, which is of material interest to proprietors, present and potential creditors and, investors. The accountant should not allow any secret reserve to be created.

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htroduction to Financiai Accounts (F YBMsSem, , he mrntion has the, following, , The, , advantages, , pared accounts convey tnie and correct information., , The hoit Loss of the business is correctly calculated., , The Balance Sheet shows true, , position., , dhoper dividend may be paid to the shareholders., e, Ihoper taves may be paid to the govemment., Ditterent parties i.e. stakeholders are benefited., , 6.2.2, , Consistency, possible, , only when, , the, , coivenon, , is, w, of one accounting period with the other, The disON, comp, vi, method,, straight-line, may adopt, it is expeia itd, Consistency is followed. For example, a company, assets. But, fixed, on, dt, depreciation, other method of providing, Similarly, if stock 1s vanued, ue method, or any, consistently., Any cilange, particular method of depreciation, followed every year., ue company follows awhichever, be, should, n o t mean, principle, does, this, is less',, COSt or market price another would lead to inconsistency. However, consistency, method to, of accounting, ", introduction of improved techniques, , non-flexibility. It should permit, , The convention has the following advantages:, a), , It, , ensures, , comparability of financial, , element, D ) t eliminates an, , of uncertainty, , followed., element, C)It also eliminates the, , of different years., accounting procedure, regarding the, , statements, , of any, , preparation, personal bias regarding, , of, , to, , be, , accOunts and, , accounting reports., 6.2.3, , losses are taken, , Conservatism/Prudence, , all prospective, safe'. As per this convention, but provide tor, lt refers to the policy of playing, 'anticipate no proit, words, other, In, not all prospective profits., that it goes not only, Into consideration but, on the ground, convention is being criticised, costs and, this, all possible losses. However,, the concept of matching, also, against, but, disclosure, of full, for depreciation,, against the convention, excess provision, secret reserves by making, of, creation, the Balance sheet, revenues. It encourages, net income and, shows a lower, , The Income statement, should be, bad and doubtful debts etc., of conservatism, assets. The convention, the, understates, and, conservatism is, Overstates the liabilities, Some degree of, are not distorted., , that the results reported, not available., inevitable where objective data is, of, application of conservatism:, are the examples, , applied cautiously, , so, , Following, debtors., doubtful debts and discount on, a) Making provision for, discount on creditors., b) Not providing for, whichever is less., stock in trade at cost or market price, , c)Valuing, fluctuations in the price of investments., d) Creating provision against, value., surrender value and not at the paid up, , at, e) Showing Joint Life Policy, , )Amortization, , of intangible assets like goodwill,, , which has indefinite life., , Materiality, 6.2.4, to material details and ignore insignificant details. If, The accountant should attach importance, will be overburdened with mnute details. As per the American, this is not done, accounts, should be regarded as matertal, if there is a reason to believe that, Accounting Association, "an item, the decision of intormed investor." Therefore, keeping the, knowledge of it would influence, left out or merged with other items., convention of materiality in view, unimportant irems are eihermarket, value ofinvestment etc, notes like: contingent habilities,, Some items are shown as foot, However, an item may be material for one purpose but immaterial for another, material for, one concern but immaterial for another, Or mareridl Tor one year but immaterial for next vear, The, , Accountant should judge relative importance or eacn ltem ot every transaction, its essentialitu, which matters more, and substantiality. It is the relative importance,, , significance

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Accounting Principles (Concepts and Comventions), , 29, , AND NET WORTH, IMPACT OF CONCEPTS AND CONVENTIONS ON NET PROFIT, , 7., , Impactof Concepts/ Conventions on Profit and Net Worth, Concept Net Profit, Applied, , Examples, , Entity, , Invested F 1,00,000, , 1., , Utilised, , 2., , 50,000 for personal use, , 3, , Monetary, Monetary, , Managerresigned, Purchased Machinery worth, , T 50,000 for 30,000, Depreciate Machinery by 5,000, per year Consistent, Make provision for Doubtful, , 6., 7., , Debts 10,000, Purchase of Furniture recorded, , 8., , asasset 7 50,000, Sale of Goods on credit 20,000, , 9, , 10. Prepaid Insurance F 5,000, , 11. Purchased Building on credit, 12. Cash Sale 10,000, Preparation of Financial, , 13., , Statement in a format, 14. Disclosure of MV of Investment, 8., , EXCERCISES, , A., , Long Answer Questions:, , -, , Effect on, , Net Profit Net Worth, + 1,00,000|, 50,000, , Entity, , Paid Salaries 10,000, , Net Worth, , 10,000, , Increases, Decreases, Decreases Decreases, , Cost, , Consistency, , - 5,000, , Conservatism -10,000|, , - 5,000 Consistent, - 10,000 Decreases Decreases, , Going, , Concern, , Realisation, , +20,00b0, , +20,000 Increases Increases, , Accrual, , +5,000, , + 5,000 Increases Increases, , Dual Aspect+ 10,000, , + 10,000| Increases ncreases, , Dual Aspect, , Disclosure, Materiality, , What do you mean by accounting principles?, 2., , 3., 4, 5., B., , Describe various accounting concepts in detail., on financial, Explain the effect of going concern and periodicity concepts, Explain various conventions in financial accounting. conventions?, What is the importance of Accounting concepts and, , Short Answer Questions, ., 2., 3., 4., , What do you mean by accounting principles?, What is Business Entity concept?, Give the meaning of Going Concern Concept?, Enumerate the, , principle of matching cost with, , Describe in brief the, ., , 7., 8., , 9, C., , statements., , principle of full, , revenue., , disclosure., , Explain Dual Aspect Concept., Explain the principle of consistency., Define the, , principle of conservatism., , What is Accounting period concept?, , Write short notes on:, 2., , Entry Concept, Realisation Concept, Matching Concept, , 4., , Conservatism, , 5., , Consistency, , 6., , Accrual Aspect, , Nov., 2016), Nov, 2017