Accounting Concepts,

Conventions and Principles

MBA - I
 Accounting Concepts
• Accounting concepts are the basic rules, assumptions, and conditions that
define the parameters and constraints within which accounting operates.

• These are the basic assumptions on the basis of which Financial Statements
are prepared.

• The term accounting concepts refer to basic rules, assumptions, and principles
which act as a primary standard for recording business transactions and
maintaining books of accounts.
 Objectives of the Accounting Concept
• The primary aim of accounting concepts is to maintain uniformity and
regularity in the preparation of accounting statements.

• Accounting concepts act as an underlying principle that helps accountants

in the preparation and maintenance of business records.

• It aims to understand the business rules and regulations that are required to
be followed by all types of business entities and hence simplifying the
detailed and comparable financial information.
 Accounting Concepts

1. Business Entity Concept

2. Accrual Concept
3. Accounting Cost Concept
4. Dual Aspect
5. Going Concepts
6. Money Measurement Concept
7. Accounting Period Concepts
8. Realization Concept
9. Matching Concepts
 1. Business Entity Concept

• This concept assumes that, for accounting purposes, the business enterprise
and its owners are two separate independent entities.

• Thus, the business and personal transactions of its owner are separate.

• For example, when the owner invests money in the business, it is recorded as
a liability of the business to the owner.

• Similarly, when the owner takes away from the business cash/goods for
his/her personal use, it is not treated as a business expense.
 2. Accrual Concept
• Accrual- something that becomes due especially an amount of money that is yet to
be paid or received at the end of the accounting period.

• It means that revenues are recognized when they become receivable, though cash is
received or not received, the expenses are recognized when they become payable,
though cash is paid or not paid.

• Both transactions will be recorded in the accounting period to which they relate.
• The accrual concept under accounting assumes that revenue is realized at the time
of sale of goods or services irrespective of the fact when the cash is received.
 3. Accounting Cost Concept

• It states that all assets are recorded in the books of accounts at their
purchase price, which includes the cost of acquisition, transportation and
installation and not at its market price.

• It means that fixed assets like buildings, plant and machinery, furniture, etc.
are recorded in the books of accounts at a price paid for them.
 4. Dual Aspect Concept
• This concept assumes that every transaction has a dual effect.
• Therefore, the transaction should be recorded at two places.
• Both the aspects of the transaction must be recorded in the books of
accounts.

• Thus, the duality concept is commonly expressed in terms of fundamental

accounting equation :

Assets = Liabilities + Capital

 5. Going Concern Concepts

• This concept states that a business firm will continue to carry on its activities
for an indefinite period of time.

• Simply stated, it means that every business entity has continuity of life.
• Thus, it will not be dissolved in the near future.
• This is an important assumption of accounting, as it provides a basis for
showing the value of assets in the balance sheet.
 6. Money Measurement Concept
• This concept assumes that all business transactions must be in terms of
money (rupees).

• Sale of goods worth Rs.200000, Rent Paid Rs.10000 etc. are expressed in
terms of money, and so they are recorded in the books of accounts.

• While sincerity and loyalty are not recorded in books of accounts because
these cannot be measured in terms of money although they do affect the
profits and losses of the business concern.
 7. Accounting Period Concepts

• All the transactions are recorded in the books of accounts on the

assumption that profits on these transactions are to be ascertained for a
specified period.

• This concept requires that a balance sheet and profit and loss account
should be prepared at regular intervals.
 8. Realization Concept

• This concept states that revenue from any business transaction should be
included in the accounting records only when it is realized.
• The term realization means the creation of the legal right to receive money.
• Selling goods is realization, receiving orders is not.
• In other words, it can be said that: Revenue is said to have been realized
when cash has been received or the right to receive cash on the sale of
goods or services or both have been created.
• The concept of realization states that revenue is realized at the time when
goods or services are actually delivered.
 9. Matching Concepts

• The matching concept states that the revenue and the expenses incurred to
earn the revenues must belong to the same accounting period.
• So once the revenue is realized, the next step is to allocate it to the relevant
accounting period.
• This can be done with the help of the accrual concept.
• If the revenue is more than the expenses, it is called profit.
• If the expenses are more than revenue, it is called loss.
• This is what exactly has been done by applying the matching concept
• Therefore, the matching concept implies that all revenues earned during an
accounting year, whether received/ not received during that year and all
costs incurred, whether paid/ not paid during the year should be taken into
account while ascertaining profit or loss for that year.
 Accounting Conventions
• These are outcomes of accounting practices or principles being followed
over a period of time.
• Accounting conventions are certain guidelines for complicated and unclear
business transactions, though it is not compulsory or legally binding,
however, conventions maintain consistency in financial statements.
• While standardizing the financial reporting process these conventions
consider comparison, relevance, full disclosure of transactions, and
application in financial statements.
• Accounting bodies change them as per the needs of their country
considering the required quality of Financial Information.
• Conventions denote customs or traditions or usages which are in use for a
long.
• To be clear, these are nothing but unwritten laws.
• An accounting convention refers to common practices which are universally
followed in recording and presenting accounting information of the business
entity.
• The accountants have to adopt the usage or customs, which are used as a
guide in the preparation of accounting reports and statements.
• These conventions are also known as the doctrine.
 Accounting Conventions

1. Conservatism
2. Consistency
3. Full Disclosure
4. Materiality
 1. Conservatism

• This convention is based on the principle that “Anticipate no profit, but

provide for all possible losses”.
• It is based on the policy of playing safe in regard to showing profit.
• The main objective of this convention is to show a minimum profit.
• Profit should not be overstated.
• For example, valuing closing stock at cost or market price whichever is
lower, creating provision for doubtful debts, discount on debtors, writing off
intangible assets like goodwill, patent, etc
 2. Consistency

• The convention of consistency means that the same accounting principles

should be used for preparing financial statements year after year.
• A meaningful conclusion can be drawn from the financial statements of the
same enterprise when there is a comparison between them over a period of
time.
 3. Full Disclosure

• Convention of full disclosure requires that all material and relevant facts
concerning financial statements should be fully disclosed.
• Full disclosure means that there should be full, fair and adequate disclosure
of accounting information.
• Adequate means a sufficient set of information to be disclosed.
• Fair indicates an equitable treatment of users.
• Full refers to a complete and detailed presentation of information.
 4. Materiality

• The convention of materiality states that to make financial statements

meaningful, only material facts i.e. important and relevant information
should be supplied to the users of accounting information.

• Material fact means the information which will influence the decision of its
user.
 Accounting Standards

• Accounting Standards refers to a common set of accounting standards,

principles, and procedures which are used by all companies in a country for
the preparation and disclosure of their financial statements.

• In other words, these are a set of rules to be followed while preparing

financial statements.
 Why do we need Accounting Standards?

• For comparison with other companies

• To evaluate the true value or correct picture of financial statements of
companies.

• To present a correct and true picture of the company to various

stakeholders.
 GAAP, IFRS, IndAS

• Who formulates these standards?

• IASB- International Accounting Standard Board, London, UK

• FASB- Financial Accounting Standard Board, Connecticut, USA
• ICAI- Institute of Chartered Accountants of India, New Delhi, India
 Generally Accepted Accounting Principles
(GAAP)

• GAAP refers to a common set of accounting standards, principles and

procedures issued by the Financial Accounting Standard Board, Connecticut,
USA.

• GAAP is a wider term and it generally includes:

• IFRS- International Financial Reporting Standards

• IndAS- Indian Accounting Standards

 GAAP

International GAAP (IAS)

National GAAP (AS)
(some group of countries together adopt some
(Made by some countries separately)
standards)

2015 Onwards
IndAS 2015 Onwards
(prepared in line with IFRS
IFRS)
 Most countries in the world now want to
become IFRS compliant

IFRS Converse IFRS Adoption

(Preparing won standards but in line with
(Adopting IFRS prepared by IASB)
IFRS)

Ex-Bangladesh,
Ex- USA, China,
Malaysia, Hong
Japan
Kong
 IndAS: Background

• Ind AS was introduced with a view to

enhancing acceptability and transparency
of the financial information communicated
by Indian corporates through their financial
statements throughout the globe
• This move towards IFRS was subsequently
accepted by the Government of India and
was announced by the Hon'ble Finance
Minister of India, Arun Jaitely, in his Budget
Speech in July 2014
Roadmap for implementing Ind AS
• Insurance companies
• IRDAI vide press release dated June 28 2017 has deferred the implementation of Ind
AS for the Insurance Sector in India for a period of two years and the same shall now
be implemented effective from 2020 21

• Scheduled Commercial Banks (excluding Regional Rural Banks)

RBI vide press release dated April 05,
2018 has deferred the Further, RBI vide notification dated
implementation of Ind AS for the March 22, 2019 has again deferred
Scheduled Commercial Banks the implementation of Ind AS for the
(excluding Regional Rural Banks) for Scheduled Commercial Banks
a period of one year and the same (excluding Regional Rural Banks) till
shall now be implemented further notice.
effectively from 1st April 2019.
 Key takeaways of Ind AS

1. Ind AS 1: Presentation of Financial Statement:

2. Ind AS 2: Inventories
3. Ind AS 7: Statement of Cash Flow
4. Ind AS 8: Accounting Policies, Changes in Accounting Estimates and Errors
5. Ind AS 16: Property, Plant and Equipment
6. Ind AS 19: Employee Benefits
7. Ind AS 21: The Effects of Changes in Foreign Exchange Rates
8. Ind AS 23: Borrowing Cost
9. Ind AS 24: Related Party Disclosures
10.Ind AS 33: Earnings per Share
11.Ind AS 34: Interim Financial Reporting
12.Ind AS 36: Impairment of Assets
13.Ind AS 40: Investment Property
14.Ind AS 38: Intangible Assets
15.Ind AS 41: Agriculture
16.Ind AS 101: First time Adoption of Indian Accounting Standards
17.Ind AS 102: Share-based Payment
18.Ind AS 103: Business Combination
19.Ind AS 105: Non-current Assets Held for Sale and Discontinued Operations
20.Ind AS 109: Financial Instruments
 References

• Accounting for Management by Maheshwari, Maheshwari and Maheshwari, Vikas Publishing

House, 5e, 2022
• Financial Accounting – A Managerial Perspective by Narayanaswamy, PHI Learning Pvt. Ltd., 7e,
2022.
• https://www.mca.gov.in/Ministry/pdf/INDAS1.pdf