Accounting Concepts and Conventions

Accounting Concepts: May be considered as postulates i.e., basic assumptions or conditions upon which the science of accounting is based. There is no authoritative list of these concepts but most of the following concepts have fairly general support. The concepts and conventions can be put in the form of a chart as given below



Business Entity: This concept implies that a business unit is separate and distinct from the persons who supplies capital to it. Irrespective of the form of organization, a business unit has got its own individuality as distinguished from the persons who own or control it. The accounting equation (i.e. Assets= Liabilities + Capital) is an expression of the entity concept because it shows that the business itself owns the assets and in turn owes the various claimants.

Money measurement:

Money is the only practical unit of measurement that can be employed to achieve homogeneity of financial data, so accounting records have only those transactions which can be expressed in terms of money though quantitative records are also kept. The advantage of expressing business transactions in terms of money is that money serves as common denominator by means of which heterogeneous facts about a business can be expressed in terms of numbers (i.e. money) which is enables of additions and subtractions.

Going Concern: It is assumed that a business unit has a reasonable expectation of continuing business at a profit for an indefinite period of time. Due to this concept the suppliers supply goods on credit and the fixed assets are recorded at original cost and not at liquidation value; depreciation is also charged on original cost without concern to realization value.

Cost: A concept of accounting, the assets are recorded at the cost incurred in acquiring them. This will reduce the scope for subjectivity and personal bias.

Dual Aspect: This is the basic concept of accounting. According to this concept, every financial transaction involves a two-fold aspect: yielding of that benefit and giving of that benefit. So there must be two effects one receiving effect and the other giving effect. That’s why every debit has a corresponding credit.

Accounting Period: The measurement of business income or a loss on a whole life basis is very simple. But for that purpose the company has to be liquidated to find the performance. To get out of this, the final accounts are prepared on periodical basis normal for a year

Matching: This concept is based on the accounting period concept. The most important objective of running a business is to ascertain profit periodically. The determination of profit of a particular accounting period is essentially a process of matching the revenue recognized during the period and the costs to be allocated to the period to obtain the revenue.

Accounting conventions: The term convention denotes circumstances or traditions which guide the accountants while preparing the accounting statements

Consistency: Accounting rules, practices and conventions should be continuously observed and applied i.e., they should not change from one year to another. The results of different years will be comparable only when accounting rules are continuously adhered to from year to year.

Full Disclosure: According to this convention, all accounting statements should be honestly prepared and to that end full disclosure of all significant information should be made. All information which is of material interest to proprietors, creditors and investors should be disclosed in accounting statements.

Conservatism: Conservatism means taking the gloomy view of a situation. It is a policy of caution or playing safe. With this, the businessmen take into account all the possible losses which may occur and ignore the possible gains in future while recording the accounts. The closing stock is valued at market price or cost price which ever is less and this is the application of the principle of conservatism

Materiality: Whether something should be disclosed in the accounts or not in the financial statements will depend on whether it is material or not. Materiality depends on the amount involved in the transaction. For example, the expense incurred in purchasing a waste basket worth Rs.50 is termed as expense for the year rather than a asset.Customs also drives the materiality only round figures have to be recorded to make the figures manageable without affecting the accuracy.