accounting principles
DESCRIPTION
Here the Backbone of Accounting has been discussed. The Generally Accepted Accounting Principles which are generally followed round the globe which includes few Fundamental Accounting Assumptions (which are presumed to be followed by every Accountant). The Basis of Accounting & the Accounting Concepts has been explained elaborately. Some Accounting policies & Estimates are discussedTRANSCRIPT
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Generally Accepted Accounting Principles
The Backbone of Accounting Information system,
1. Accounting Assumptions.2. Accounting Concepts/Conventions.3. Accounting Standards.
( Accounting Principles are the doctrines behind the application of accounting concepts/practices)
Consistency
Accrual
Going concern
FUNDAMENTAL ACCOUNTING ASSUMPTIONS
Meaning : Accounting policy chosen should be consistently applied
Example : ABC Ltd. uses WDV method of Depreciation, year after year.
Objective: Comparability, Understandability
Consistency
- A Basis of Accounting.
- Transactions are recorded as per its accrual/not on realization.
- Expenses are recognized on its incurrence, not when paid
- Incomes are recognized when earned, not received.
Accrual
Accrual basis Cash Basis
- Recording in the period of - Recording in the period of
transaction accrued (Cash/Credit) receipt/payment of Cash
- Distinction of Capital/Revenue - No such distinctiontransactions- Capital Transactions (Balance Sheet)Revenue transactions (P & L A/c)- Eg. P & L A/c, - Eg. Cash, Bank, Receipts
Income & Expenditure A/c & Payments A/c
-
Basis of Accounting
The business will go on forever, It will never end either intentionally or
unintentionally.
Due to this concept, the Assets/Liabilities have been divided
into Fixed/Current.
Going Concern
AS PER ACCOUNTING STANDARD 1
“ DISCLOSURE OF ACCOUNTING POLICIES”
ACCOUNTING ASSUMPTIONS ARE NOT TO DISCLOSED (IF FOLLOWED)
Fundamental Accounting Assumptions
Business Entity Money Measurement Dual Aspect
Historical Cost
Conservatism
Matching Periodicity Materiality Full
Disclosure
Revenue Recognition
Accounting Concepts
Owner & the business Entity are separate persons
Personal assets/liabilities not included in business accounting
Personal expenses from business- “Drawings”
Capital by owner- “Liability” for business
Business Entity Concept
Asset/Liability – recorded at ORIGINAL COST
Market Value/Time value of money- not considered.
Original Cost= Purchase Cost + Capital Expenditure
Historical Cost Conept
Transactions/Events measurable in Money are only considered
Only Quantitative transactions (No Qualitative)
Items, not in money terms “ not a transaction at all”- should not be recorded
Money measurement Concept
A scale/standard of measurement Limitations:
1. No universal denomination.2. Not stable in the dimension3. Not an exact measurement discipline
Elements :
a. Identification of objects & events to be measured
b. Selection of standard or scale to be used.c. Evaluation of dimension or measurement
standard or scale.
Money
Historical Cost Realizable value
Current/Replacement Cost
Present Value (as per time value of money)
Note : Future Value is ignored
Valuation Principles
Concept of definite accounting period
An accounting period is to be selected (as business life is indefinite)
Helps in :- Comparison (Intra Firm/Inter Firm)- Uniformity/Consistency- Matching
Periodicity Concept
The periodical revenues earned & expenses incurred should be matched.
Helps in compiling P & L A/c
Matching Concept
Also known as “ Double Entry System”
Every transaction or event has two aspects (Debit & Credit) or affect at least two accounts.
For every Debit, there is an equal credit, for every credit, there is an equal debit.
Verification: “Accounting Equation” (Based on Balance Sheet)
“Capital + Liabilities = Assets”
Dual Aspect Concept
Prudence Concept (being Cautious)
“Do not anticipate the probable incomes/profits, but
provide for all the probable losses
leads to understatement of assets (Cost /Market Value, whichever is lower)
Contradicts Cost Concept
Conservatism Concept
Items having significant effects
(relevant for decision makers)
Should be disclosed separately ( highlighted)
exception of the full disclosure conceptNote :a. Materiality (both quantitative/qualitative point of view)b. Insignificant/Small items may be ignored.
Materiality
every aspect of the accounting should be shown/disclosed
Nothing should be hidden
Determines the characteristic of “Completeness”
Informations are disclosed in “Notes to accounts”
Full Disclosure Concept
Also called as “Realization concept”
Transaction to be recognized when “realized”
REVENUE RECOGNITION CONCEPT
Specific accounting principles and methods of applying these principles
Policies vary from concern to concern
areas where different Accounting policies can be used:a. Methods of depreciationb. Valuation of inventoriesc. Valuation of investmentsd. Etc.
Accounting policies
Basis of selection of Accounting policies
Prudence Materiality
Substance over form
Note : The characteristics of True & fair view & Accrual is also considered
Selection of Accounting policies
Accounting policies should be consistently applied
Policy can be changed :
a. Change is required as per statute/legislatureb. Change is for compliance of Accounting Standardc. For more better/appropriate presentation of
financial statement
Accounting policies
The judgments/reasonable estimates needed.
Provisions (an accounting estimate)
Change in accounting estimate
difference arises between certain parameters estimated earlier and re-estimated during the current period or actual result achieved during the current period.
Accounting estimates
Q.1. RPC Ltd. follows the written down value method of depreciating machinery year after year by applying the principle of
MCQs
Comparability
Convenience
Consistency
All of the above
C
Q.2. “Business unit is separate & distinct from the persons who supply capital to it”, is based on
MCQs
Money Measurement Concept
Going concern Concept
Business Entity Concept
Dual Aspect Concept
c
Q.3. All of the following are valuation principles except:
MCQs
Historical Cost
Present Value
Future Value
Net Realizable Value
c
Q.4. A businessman purchased goods for ` 25,00,000 and sold 80% of such goods during the accounting year ended 31st March, 2011. The market value of the remaining goods was ` 4,00,000. He valued the closing Inventory at cost. He violated the concept of
MCQs
Money measurement
Conservatism
Cost
Periodicity
b
Q.5. Writing of transaction in the ledger is called :
MCQs
Posting
Journalizing
Balancing
Casting
a
Q.6. The Cost of a Calculator has been treated as an expense due to which concept?
MCQs
Prudence
Substance over Form
Materiality
All of These
c
Q.7. In double entry book keeping system, every transaction affects at least ______account(s).
MCQs
One
Two
Three
Four
b
Q.8. According to which concept, the owner of an enterprise pays the ‘interest on drawings’?
MCQs
Accrual concept
Conservatism concept
Dual aspect concept
Entity concept
d
Q.9. Fundamental Accounting Assumptions are:
MCQS
Going Concern, Conservation, Accrual
Going Concern, matching, consistency
Going concern, Consistency, Accrual
Going concern, entity, Periodicity
c
Q.10. Double entry Principle means:
MCQs
Writing twice the same entry
Writing all the entries twice in the book
Having debit for every credit and credit for each debit
All of the above
c