Unit-1 Conventions and concepts BA | BBA First year

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Accounting Principles, Conventions and Concepts

• Many basic accounting principles have been developed through common usage. They form the foundation on which the entire suite of accounting standards is built. The most famous of these theories are as follows.

Accrual principle:

• This is the concept that accounting transactions should be recorded in the accounting periods when they actually occur, rather than in the period when there are cash flows associated with them. This is the foundation of the accrual basis of accounting. It is important for the construction of financial statements that show what actually happened in an accounting period, rather than being artificially delayed or accelerated by the associated the accrual principle, you would record an expense only when you paid for it, which might incorporate a lengthy delay caused by the payment terms for the associated supplier invoice.

Conservatism Principle:

• This is the concept that you should record expenses and liabilities as soon as possible, but to record revenues and assets only when you are confident that they will occur. This gives an introduction
• A conservative inclination towards financial statements that may under-report profits, revenues and asset recognition may be delayed for some time. On the contrary, this principle encourages recording losses in advance, Instead of later. This concept can be taken too far, where if a business makes persistent misrepresentations the results will be worse than the real case.

Consistency principle:

• This is the concept that, once you adopt an accounting principle or method, you should continue using it until a clearly better principle or method comes along. Not following the consistency principle means that a business can constantly jump between different accounting treatments of its transactions which makes its long-term financial results extremely difficult to identify.

Cost Principle:

• This is the concept that a business should record its assets, liabilities and equity investments only at their original purchase cost. This principle is becoming less valid, as many accounting standards move toward adjusting assets and liabilities at their fair values.

Economic Unit Theory:

• It is concept of a business transaction It should be kept separate from those Owners and other businesses. it prevents Reconciliation of assets and liabilities multiple entities, which who can Reason considerable difficulties when it comes to finances Statements of a budding business are the first Audited.

Full Disclosure Principle:

• This concept is You should include all information in or along with a business’s financial statements that might affect the reader’s understanding of those statements. Accounting standards have greatly extended this concept in specifying a large number of informational disclosures.

Going Concern Theory:

• This concept is that a business will remain operational in the near future.  Otherwise, you have to identify all the expenses at once and not postpone any of them.

Reconciliation Principle:

• This is the concept that, when you record revenue, you should also record all related expenses at the same time. Thus, you charge inventory at cost of goods sold at the same time you record revenue from the sale of those inventory items. It is the cornerstone of the accrual basis of accounting. The cash basis of accounting does not use the matching principle.

Materiality principle:

• It is the concept You must record the transaction in accounting records if not doing so could alter the decision-making process of someone reading the company’s financial statements. This is a fairly vague concept that is difficult to measure, which has led some of the more picayune controllers to record even the smallest transactions.

Monetary unit theory:

• This concept is A business should only record transactions that can be described in terms of a unit of currency. Thus, it is quite easy to record the purchase of a fixed asset because it was purchased for a specific price, whereas the value of a business’s quality control system is not recorded. This concept prevents a business from engaging in excessive levels of estimation in arriving at the value of its assets and liabilities.

Reliability theory:

• This is the concept only those transactions which can be proven should be recorded. For example, supplier invoices are solid evidence that an expense has been recorded. This concept is of major interest to auditors, who are constantly on the lookout for transactions. supporting evidence

Revenue Recognition Principle:

• It is the concept is that you should recognize revenue only when the business has substantially completed the earning process. 

Period Principle:

• The concept that a business should report the results of its operations over a standard period.
• These principles are incorporated into many accounting frameworks, from which accounting standards govern the treatment and reporting of business transactions.

Accounting Concepts

1. Business Entity Concept: A business and its owner should be treated differently as far as finances transactions are concerned.
2. Money Measurement Concept: Only business transactions that can be expressed in money terms are recorded in accounting, although the transactions are recorded separately. Other types can also be kept
3. Concept of dual aspect: for each Credit, a corresponding debit is created. Recording of transactions is complete only with this double aspect.
4. Going Concern Concept: In accounting, a business is expected to continue for a long period of time and meet its commitments and obligations. This assumes that the business will not be forced to cease operations and liquidate its assets at “fire-sale” prices.
5. Cost Concept: Fixed assets of a business are recorded at their original cost in the first year of accounting. Subsequently, these assets are recorded minus depreciation. Any rise or fall in the market price is not taken into account. This concept applies only to fixed assets.
6. Concept of Accounting Year: Every business chooses a specific time period to complete a cycle of the accounting process – for example, monthly, quarterly, or annually – according to a fiscal or a calendar year.
7. Matching Concept: This principle dictates that for every entry of revenue recorded in a given accounting period, a corresponding expenditure entry should be recorded for correct calculation of profit or loss in a given period.
8. According to the concept of understanding this concept recognizes the benefits Only when it is earned. Advance or fee paid is not considered profit until the goods or services are received Handed over to the buyer.

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