ACCOUNTING FOR

MANAGERS
TOPIC: ACCOUNTING CONCEPTS AND
CONVENTIONS
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FaiZY

ACCOUNTING PRINCIPLES
Accounting principles
may be defined as those rules of
action or conduct which are adopted
by accountants universally while
recording transactions. These
principles can be classified into two
categories,
1. Accounting Concepts.
2. Accounting Conventions.

ACCOUNTING CONCEPTS
The term concepts includes
those basic assumptions or conditions
upon which the science of accounting is
based . The following are the important
accounting concepts:
1.
2.
3.
4.
5.
6.
7.
8.

Separate Entity Concept.

Going Concern Concept
Money Measurement Concept.
Cost Concept.
Dual Aspect Concept.
Accounting Period Concept.
Realization Concept.
Matching Concept.

Accounting Concepts
1. Separate Entity concept.
Business is treated as separate &
distinct from its owners.
Separate set of books are prepared.
Proprietor is treated as creditor of
the business.
For other business of proprietor
different books are prepared.

Accounting Concepts.
2. Going Concern Concept
Business will continue for a long
period.
As per this concept, fixed assets are
recorded at their original cost &
depreciation is charged on these
assets.
Because of this concept, outside
parties enter into long term contracts
with the enterprise.

Accounting Concepts.
3. Money Measurement Concept
Transactions of Monetary nature are
recorded.
Transactions of qualitative nature,
even though of great importance to
business are not considered.

Accounting Concepts.
4. Cost Concept(HISTORICAL COST)

Assets are recorded at their original

price.
This cost serves the basis for further
accounting treatment of assets.
Acquisition cost relates to the past
i.e. it is known as historical cost.

Accounting Concepts.
5. Dual Aspect Concept.
Every transactions recorded in books
affects at least two accounts.
If one is debited then the other one
is credited with same amount.
This system of recording is known as
DOUBLE ENTRY SYSTEM
ASSETS = LIABILITES + CAPITAL.

Accounting Concepts.
6. Accounting Period Concept.
Entire life of the firm is divided into
time intervals for ascertaining the
profits/ losses are known as
accounting periods.
Accounting period is of two types
1. Financial Year (1st Apr- 31st March)
2. Calendar Year ( 1st Jan 31st Dec)

Accounting Concepts.
7. Realization Concept
Also known as Revenue Recognition
Concept.
Revenue means the addition to the
capital as a result of business
operations,
Revenue is realized on three basis -:
1. Basis of Cash
2. Basis of Sale
3. Basis of Production.

Accounting Concepts.
8.

Matching Concept.

All the revenue of a particular period

will be matched with the cost of that
period for determining the net profits
of that period.
Accordingly , for matching costs with
revenue , first revenue should be
recognized & then costs incurred for
generating that revenue should be
recognized.

ACCOUNTING CONVENTIONS.
The term Conventions
includes those customs or traditions which
guide the accountant while preparing the
accounting statements. The following are
the important accounting conventions.
1. Conventions of Conservatism.
2. Convention of Full Disclosure.
3. Convention of Materiality.
4. Convention of Consistency.

Accounting conventions.
1. Conventions of Conservatism.

All anticipated losses should be

recorded but all anticipated gains
should be ignored.
It is a policy for playing safe.
Provisions is made for all losses
even though the amount cannot be
determined with certainty.

Accounting conventions.
2. Convention of Full Disclosure.

Information relating to the economic

affairs of the enterprise should be
completely disclosed which are of
material interest to users.
Performa & contents of balance
sheet & P&L a/c are prescribed by
companies Act.
It does not mean that leaking out the
secrets of the business.

Accounting conventions.
3.Convention of Materiality.

According to American Accounting

Association, An item should be
regarded as material if there is a reason
to believe that knowledge of it would
influence decision of informed investor.
It is an exception to the convention of
full disclosure.
Items having an insignificant effects to
the user need not be disclosed.

Accounting conventions.
4. Convention of Consistency.
Accounting method should remain
consistent year by year.
This facilities comparison in both
directions i.e. infra firm & inter firm.
This does not mean that a firm
cannot change the accounting
methods according to the changed
circumstances of the business.

THANK
YOU.