Advance FA Term Paper1

I.
Accounting Concepts
(1) Entity Concept:
Separate entity concept implies that business unit or a company is a body corporate and having
a separate legal entity distinct from its proprietors. The proprietors or members are not liable for
the acts of the company. But in the case of the partnership business or sole trader business no
separate legal entity from its proprietors. Here proprietors or members are liable for the acts of
the firm. As per the separate entity concept of accounting it applies to all forms of business to
determine the scope of what is to be recorded or what is to be excluded from the business
books. For example, if the proprietor of the business invests Rs.50,000 in his business, it is
deemed that the proprietor has given that much amount to the business as loan which will be
shown as a liability for the business. On withdrawal of any amount it will be debited in cash
account and credited in proprietor's capital account. In conclusion, this separate entity concept
applies much larger in body corporate sectors than sole traders and partnership firms.
(2) Dual Aspect C o n c e p t :
According to this concept, every business transaction involves two aspects, namely, for
every receiving of benefit and, there is a corresponding giving of benefit. The dual aspect
concept is the basis of the double entry book keeping. Accordingly for every debit there is an
equal and corresponding credit. For example, Mr. Thomas Starts business with cash of
Ksh.100, 000 and building of Ksh.500,000, then this fact is recorded at two places ; Assets
Accounts and Capital Account. In other words, the business acquires assets of Ksh.600, 000
which is equal to the proprietors capital in the form of cash of Ksh.100, 000 and building
worth of Ksh.500, 000.
(3) Accounting Period Concept:
According to this concept, income or loss of a business can be analyzed and determined on the
basis of suitable accounting period instead of wait for a long period, i.e., until it is liquidated.
Being a business in continuous affairs for an indefinite period of time, the proprietors, the
shareholders and outsiders want to know the financial position of the concern, periodically.
Thus, the accounting period is normally adopted for one year. At the end of the each
accounting period an income statement and balance sheet are prepared. This concept is simply
intended for a periodical ascertainment and reporting the true and fair financial position of the
concern as a whole.
(4) Going Concern Concept:

It is otherwise known as Continue of Activity Concept. This concept assumes that business
concern will continue for a long period to exit. In other words, under this assumption, the
enterprise is normally viewed as a going concern and it is not likely to be liquidated in the near
future. This assumption implies that while valuing the assets of the business on the
basis of productivity and not on the basis of their realizable value or the present market
value, at cost less depreciation till date for the purpose of balance sheet. It is useful in
valuation of assets and liabilities, depreciation of fixed assets and treatment of prepaid
expenses.
(5) Cost Concept:
This concept is based on "Going Concern Concept." Cost Concept implies that assets acquired
are recorded in the accounting books at the cost or price paid to acquire it. And this cost is the
basis for subsequent accounting for the asset. For accounting purpose the market value of
assets are not taken into account either for valuation or charging depreciation of such assets.
Cost Concept has the advantage of bringing objectivity in the preparation and presentation
of financial statements. In the absence of cost concept, figures shown in accounting records
would be subjective and questionable. But due to inflationary tendencies, the preparation of
financial statements on the basis of cost concept has become irrelevant for judging the true
financial position of the business.
(6) Money Measurement Concept:
According to this concept, accounting transactions are measured, expressed and recorded in
terms of money. This concept excludes those transactions or events which cannot be
expressed in terms of money. For example, factors such as the skill of the supervisor, product
policies, planning, employer-employee relationship cannot be recorded in accounts in
spite of their importance to the business. This makes the financial statements incomplete.
7) Matching Concept:
Matching Concept is closely related to accounting period concept. The chief aim of the
business concern is to ascertain the profit periodically. To measure the profit for a particular
period it is essential to match accurately the costs associated with the revenue. Thus, matching
of costs and revenues related to a particular period is called as Matching Concept.
(8) Realization Concept:
Realization Concept is otherwise known as Revenue Recognition Concept. According to this

concept, revenue is the gross inflow of cash, receivables or other considerations arising in the
course of an enterprise from the sale of goods or rendering of services from the holding of
assets. If no sale takes place, no revenue is considered. However, there are certain
exceptions to this concept. Examples, Hire Purchase/Sale, Contract Accounts etc.
(9) Accrual Concept:

Accrual Concept is closely related to Matching Concept. According to this concept, revenue
recognition depends on its realization and not accrual receipt. Likewise costs are recognized
when they are incurred and not when paid. The accrual concept ensures that the profit or loss
shown is on the basis of full fact relating to all expenses and incomes.
(10) Rupee Value Concept:

This concept assumes that the value of rupee is constant. In fact, due to inflationary pressures,
the value of rupee will be declining. Under this situation financial statements are prepared on
the basis of historical costs not considering the declining value of rupee. Similarly depreciation
is also charged on the basis of cost price. Thus, this concept results in underestimation of
depreciation and overestimation of assets in the balance sheet and hence will not reflect the
true position of the business.
II. Accounting Conventions

(1) Convention of Disclosure:
The disclosure of all material information is one of the important accounting conventions.
According to this convention all accounting statements should be honestly prepared and all
facts and figures must be disclosed therein. The disclosure of financial information is required
for different parties who are interested in the welfare of that enterprise. The Companies Act
lays down the forms of Profit and Loss Account and Balance Sheet. Thus convention of
disclosure is required to be kept as per the requirement of the Companies Act and Income Tax
Act.
(2) Convention of Conservatism:
This convention is closely related to the policy of playing safe. This principle is" often described
as "anticipate no profit, and provide for all possible losses." Thus, this convention emphasizes
that uncertainties and risks inherent in business transactions should be given proper
consideration. For example, under this convention inventory is valued at cost price or
market price whichever is lower. Similarly, bad and doubtful debts are made in the books
before ascertaining the profit.
(3) Convention of Consistency:
The Convention of Consistency implies that accounting policies, procedures and methods
should remain unchanged for preparation of financial statements from one period to another.
Under this convention alternative improved accounting policies are also equally acceptable. In
order to measure the operational efficiency of a concern, this convention allows a meaningful
comparison in the performance of different period.
(4) Convention of Materiality:
According to Kohler's Dictionary of Accountants, Materiality may be defined as "the
characteristic attaching to a statement fact, or item whereby its disclosure or method of giving it
expression would be likely to influence the judgment of a reasonable person." According to
this convention consideration is given to all material events, insignificant details are ignored
while preparing the profit and loss account and balance sheet. The evaluation and decision of
material or immaterial depends upon the circumstances and lies at the discretion of the
Accountant.

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I.

(4) Going Concern Concept:

Realization Concept is otherwise known as Revenue Recognition Concept. According to this

(9) Accrual Concept:

(10) Rupee Value Concept:

II. Accounting Conventions

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