2. Accounting Assumptions
(a) “Assumption” refers to the fundamental Premise /
Condition based on which the entire accounting
process is carried out.
(b) In Accounting, there are 3 Fundamental Accounting
Assumptions – (a) Going Concern, (b) Consistency and
(c) Accrual.
(c) For Eg. When a person started a particular business,
we assume that the person started the business for
continuing it to earn profits and not for closing it.
3. GAAP
• Generally accepted accounting principles (GAAP) refer to a
common set of accounting principles, standards and
procedures that companies must follow when they compile
their financial statements.
• GAAP is a combination of authoritative standards (set by
policy boards) and the commonly accepted ways of recording
and reporting accounting information.
• GAAP improves the clarity of the communication of financial
information.
4. Accounting Principles
Accounting Principles refer to the set of doctrines associated with the
theory and procedures of accounting, serving as an explanation of
current practices and as a guide for the selection of conventions or
procedures where alternatives exist”.
Accounting Policies should be –
(i) based on real assumptions,
(ii) simple and easily understandable,
(iii) consistently followed,
(iv) informational to the Users, and
(v) able to reflect future predictions.
5. Characteristics of accounting principles
• Objectivity – not influenced by personal bias and
judgments. This implies that accounting information shall
be prepared in a neutral way.
• Application
• Reliability – information should be capable of being
verified.
• Feasibility – principles shall be implemented without much
complexity and cost.
• Understandability – shall be simple and easy to understand.
6. Accounting Concepts vs Accounting Principles
The difference between Accounting Concepts and
Accounting Principles is that Accounting concepts are
the important conventions with which the accounting
data is recorded based on certain assumptions whereas
Accounting principles are the rules to be followed
while reporting financial data. The former is the data
recorder while the latter is the data presenter.
7. Parameter of
Comparison
Accounting Concept Accounting Principle
Meaning/Definition Accounting concepts
are the assumptions
upon which the
accounting data is
recorded.
Accounting
Principles are the
rules to be followed
while reporting the
final data.
Purpose
The purpose is to
record data based on
the concepts.
The purpose is to
report financial data
based on regulatory
norms.
Usage
Accounting concepts
are purely internal as
the companies
record data as per
the concepts.
Accounting principles
are internal aspects
that need to be
presented to the
external bodies for
verification.
8. Parameter of
Comparison
Accounting Concept Accounting Principle
Hierarchy of process
Accounting concepts
precede accounting
principles.
Accounting principles
succeed the
accounting concepts.
Major Outcome
Accounting concepts
help in giving clarity
to the data recorded
for making the
financial statements.
Accounting principles
must follow GAAP
norms to even avail
for a bank loan and it
is legal
11. Accounting Concepts
(a) “Concept” means any idea or notion, which
has a universal application.
(b) Accounting Concepts are the basic conditions
which lay down the foundation for
formulating the accounting principles.
(c) They are clearly defined and supported by
reasoning.
12. Separate Entity Concept
Business is treated as a separate entity or
unit apart from its owner and others. All the
transactions of the business are recorded in
the books of business from the point of view
of the business as an entity and even the
owner is treated as a creditor to the extent
of his/her capital.
13. Money Measurement Concept
In accounting, we record only those
transactions which are expressed in terms
of money. In other words, a fact which can
not be expressed in monetary terms, is not
recorded in the books of accounts.
14. Going Concern Concept
It is persuaded that the business will exists
for a long time and transactions are
recorded from this point of view. The entity
is assumed to remain in operation
sufficiently long to carry out its objects and
plans.
15. Dual Aspect Concept
Each transaction has two aspects, that is,
the receiving benefit by one party and the
giving benefit by the other. This principle is
the core of accountancy.
16. Dual Aspect Concept continue…
Thus, the dual aspect can be expressed as
under
Capital + Liabilities = Assets
or
Capital = Assets – Liabilities
17. Realization Concept
•This concept emphasizes that profits should
be considered only when realized.
•Accounting should take into consideration
profits only when the same have been
realized.
18. Cost Concept
•Transactions are entered in the books of
accounts at the amount actually involved.
•Eg: A company purchases a car for
Rs.1,50,000/- the real value of which is
Rs.2,00,000/-, the purchase will be recorded
as Rs.1,50,000/-.
•This is one of the most important concept
and it prevents arbitrary values being put on
transactions.
19. Accounting Period Concept
•In accounting, life of the business is
perpetual but still it has to report the
results of activity undertaken in one year.
•So final accounts are prepared for the
accounting period which is 12 months
period and normally it is the Financial Year
( 1st April to 31st March).
20. Matching Concept
•Matching concept requires that expenses
should be matched to the revenues of the
appropriate accounting period.
• So we must determine the revenue earned
during a particular accounting period and the
expenses incurred to earn those revenues.
21. Accrual Concept
•Accrual is concerned with expected future
cash receipts and payments : Accounting
attempts to recognize non-cash events and
circumstances as they occur.
•Examples are – purchase and sales of
goods on credit ,wages and salaries
outstanding.
22. Accounting Conventions
(a) Accounting Conventions are the general procedures
emerging out of usage and practice of accounting
principles.
(b) Conventions may not have universal application.
(c) They may contradict the basic accounting principles.
(d) Further, certain conventions may be changed over a
period of time, by Accounting Bodies like ICAI, for
improving the quality of Financial Statements.
23. Convention of Conservation
•Also known as “Prudence”.
•Playing safe is the main idea.
•Eg: closing stock is valued at cost price or
market price, whichever is lower.
•Whenever there are two equally acceptable
methods, the one which is more
conservative, will be accepted.
24. Convention of Consistency
•In order to enable the management to
draw important conclusions regarding the
working of the company over a few years, it
is essential that accounting practices and
methods remain unchanged from one
accounting period to another.
• The comparison of one accounting period
with that of another is possible only when
the convention of consistency is followed.
25. Convention of Full Disclosure
•This principle implies that accounts must
be honestly prepared and all material
information must be disclosed therein.
•The contents of Balance Sheet and Profit
and Loss Account are prescribed by law.
•These are designed to make disclosure of
all material facts compulsory.
26. Materiality
• This is an exception of full disclosure principle.
• accountants should report only what is material and
ignore insignificant details while preparing the final
accounts.
• The decision whether the transaction is material or not
should be made by the accountant on the basis of
professional experience and judgment.
• An item may be material for one purpose while
immaterial for another.
27. Concepts Vs Conventions
(a) Concepts are clearly defined and supported
by reasoning while conventions may not be
clearly defined.
(b) Concepts support the principles whereas
Conventions may contradict the principles.
28. The main points of difference between accounting
concepts and accounting conventions are:
1. Recognition by accountants
Accounting concepts are recognized by accountants and are part of
guidelines for preparation of financial statements whereas
accounting conventions are past practices which are commonly
used but are not formally recognized as guideline for preparation of
financial statements.
2. Legal recognition
Accounting concepts have been developed by professional bodies
and may be backed by law and other governance bodies whereas
accounting conventions are past practices developed over time and
have no backing by governance bodies.
3. Part of accounting standards
Accounting concepts are part of accounting standards whereas
accounting conventions have been developed to deal with the
changes in financial reporting landscape that are not yet part of
accounting standards but can become part of it in future.
