Accounting (COMMERCE)

 


ACCOUNTING

1. What is Accounting?

  • Accounting is recording and summarizing all the financial transactions. Other than accounting is “Language of the business is known as Accounting.”

2. Basic Accounting Principles

  • Rules adopted universally to record financial transactions is known as an accounting principle.  Accounting principles, concepts and conventions are known as GAAP – General Accepted Accounting Principles. These principles are the guidelines for preparing Financial Statements. Accounting principles classified into 2 categories:
  1. Accounting Concept
  2. Accounting Conventions

a. Accounting Concept: In order to make accounting more meaningful, the accountants agreed on a large number of assumptions, which are usually followed to prepare a financial statement. The accounting concepts have the following points:

  1. Business Entity Concept: According to this concept, Business and Owner are two separate entities from the accounting point of view only.
  2. Money Measurement Concept: This defines that the transactions will be expressed in term of money only when it will be recorded in the book of account.
  3. Going Concern Concept: According to this concept, Business entity continues to exist indefinitely with no intention to close business.
  4. Cost Concept: According to this, the assets are recorded in a book at a price that needs to be getting paid.
  5. Duality Concept: According to this concept, every transaction has a dual effect based on the double entry system. Ex. Assets = Liabilities.
  6. Revenue Recognition Concept: This concept, also known as “Realization Concept.” It determines the point of time when the revenue is to be recognized.
  7. Accounting Period Concept: According to this concept, Business is assumed to be carried on for an indefinite period. The performance of the business is known by accounting period. The accounting period is of 1 year or 12 months is known as accounting year or financial year (1 April-31 March).
  8. Matching Concept: In this concept, it is compulsory to match revenues of the period with the expenses of that period to determine the correct profit or loss incurred in that period.
  9. Accrual Concept: According to this concept, the transactions are recorded in the books at the time when it is entered and not when the settlement takes place.
  10. Verifiable Objective Concept: According to this concept, Accounting should be free from personal bias. Every transaction should have true and fair proof. 

b. Accounting Conventions: They are traditional conventions which act as a guide to the preparation of Accounting Statement.

  1. Convention of Materiality: Information which is material (important) should be included in accounting statements and which is not important is to be ignored. “This convention emphasize on avoidance of immaterial and useless information.”
  2. Convention of Consistency: Accounting policies once adopted cannot change. Because due to changes in accounting policies, the financial statement becomes unreliable for users. If a change is being reported in the financial statement, its effect should also be shown separately.
  3. Convention of Conservatism: Also known as “Convention of Prudence”. This convention emphasis on all possible future losses but not on future gains/profits.
  4. Convention of Full Disclosure: This disclosure includes all the significant information related to the economic affairs of the entity that should affect the reader's understanding of that information.

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