Accounting Principles

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Generally Accepted Accounting Principles

• The Backbone of Accounting Information system,
• Accounting Assumptions.
• Accounting Concepts/Conventions.
• Accounting Standards.
• ( Accounting Principles are the doctrines behind
  the application of accounting concepts/practices)

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Fundamental Accounting Assumptions
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Consistency

• Meaning Accounting policy chosen should be
  consistently applied
• Example ABC Ltd. uses WDV method of
  Depreciation, year after year.
• Objective Comparability, Understandability

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Accrual

• A Basis of Accounting.
• Transactions are recorded as per its accrual/not
  on realization.
• Expenses are recognized on its incurrence, not
  when paid
• Incomes are recognized when earned, not received.

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Basis of Accounting

• Accrual basis Cash Basis
• Recording in the period of -
  Recording in the period of
• transaction accrued (Cash/Credit)
  receipt/payment of Cash
• Distinction of Capital/Revenue - No such
  distinction
• transactions
• Capital Transactions (Balance Sheet)
• Revenue transactions (P L A/c)
• Eg. P L A/c, - Eg. Cash, Bank, Receipts
  Income Expenditure A/c
  Payments A/c

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Going Concern

• The business will go on forever, It will never
  end either intentionally or unintentionally.
• Due to this concept, the Assets/Liabilities have
  been divided into Fixed/Current.

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Fundamental Accounting Assumptions

• As per Accounting Standard 1
• Disclosure of Accounting Policies
• Accounting Assumptions are not to disclosed (if
  followed)

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Accounting Concepts

• Business Entity Money Measurement Dual
  Aspect
• Historical Cost
  Conservatism
• Matching Periodicity
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  Materiality Full Disclosure
• Revenue Recognition

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Business Entity Concept

• Owner the business Entity are separate persons
• Personal assets/liabilities not included in
  business accounting
• Personal expenses from business- Drawings
• Capital by owner- Liability for business

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Historical Cost Conept

• Asset/Liability recorded at ORIGINAL COST
• Market Value/Time value of money- not considered.
• Original Cost Purchase Cost Capital
  Expenditure

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Money measurement Concept

• Transactions/Events measurable in Money are only
  considered
• Only Quantitative transactions (No Qualitative)
• Items, not in money terms not a transaction at
  all- should not be recorded

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Money

• A scale/standard of measurement
• Limitations
• 1. No universal denomination.
• 2. Not stable in the dimension
• 3. Not an exact measurement discipline
• Elements
• Identification of objects events to be measured
• Selection of standard or scale to be used.
• Evaluation of dimension or measurement standard
  or scale.

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Valuation Principles

• Historical Cost Realizable value
• Current/Replacement Cost
• Present Value
• (as per time value of money)
• Note Future Value is ignored

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Periodicity Concept

• Concept of definite accounting period
• An accounting period is to be selected (as
  business life is indefinite)
• Helps in
• Comparison (Intra Firm/Inter Firm)
• Uniformity/Consistency
• Matching

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Matching Concept

• The periodical revenues earned expenses
  incurred should be matched.
• Helps in compiling P L A/c

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Dual Aspect Concept

• Also known as Double Entry System
• Every transaction or event has two aspects
• (Debit Credit)
  
• or affect at least two accounts.
• For every Debit, there is an equal credit, for
  every credit, there is an equal debit.
• Verification Accounting Equation
• 
  (Based on Balance Sheet)
• Capital Liabilities Assets

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Conservatism Concept

• Prudence Concept (being Cautious)
• Do not anticipate the probable
  incomes/profits, but provide for all the probable
  losses
• leads to understatement of assets
• (Cost /Market Value, whichever is lower)
• Contradicts Cost Concept

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Materiality

• Items having significant
  effects
• (relevant for decision
  makers)
• Should be disclosed separately ( highlighted)
• exception of the full disclosure concept
• Note
• Materiality (both quantitative/qualitative point
  of view)
• Insignificant/Small items may be ignored.

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Full Disclosure Concept

• every aspect of the accounting should be
  shown/disclosed
• Nothing should be hidden
• Determines the characteristic of Completeness
• Informations are disclosed in Notes to accounts

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Revenue Recognition concept

• Also called as Realization concept
• Transaction to be recognized when realized

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Accounting policies

• Specific accounting principles and methods of
  applying these principles
• Policies vary from concern to concern
• areas where different Accounting policies can be
  used
• Methods of depreciation
• Valuation of inventories
• Valuation of investments
• Etc.

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Selection of Accounting policies

• Basis of selection of Accounting policies
• Prudence
  Materiality
• Substance over form
• Note The characteristics of True fair view
  Accrual is also considered

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Accounting policies

• Accounting policies should be consistently
  applied
• Policy can be changed
• Change is required as per statute/legislature
• Change is for compliance of Accounting Standard
• For more better/appropriate presentation of
  financial statement

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Accounting estimates

• The judgments/reasonable estimates needed.
• Provisions (an accounting estimate)
• Change in accounting estimate
• difference arises between certain parameters
  estimated earlier and re-estimated during the
  current period or actual result achieved during
  the current period.

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MCQs

• Q.1. RPC Ltd. follows the written down value
  method of depreciating machinery year after year
  by applying the principle of

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MCQs

• Q.2. Business unit is separate distinct from
  the persons who supply capital to it, is based
  on

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MCQs

• Q.3. All of the following are valuation
  principles except

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MCQs

• Q.4. A businessman purchased goods for
  25,00,000 and sold 80 of such goods during the
  accounting year ended 31st March, 2011. The
  market value of the remaining goods was
  4,00,000. He valued the closing Inventory at
  cost. He violated the concept of

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MCQs

• Q.5. Writing of transaction in the ledger is
  called

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MCQs

• Q.6. The Cost of a Calculator has been treated as
  an expense due to which concept?

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MCQs

• Q.7. In double entry book keeping system, every
  transaction affects at least ______account(s).

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MCQs

• Q.8. According to which concept, the owner of an
  enterprise pays the interest on drawings?

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MCQS

• Q.9. Fundamental Accounting Assumptions are

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MCQs

• Q.10. Double entry Principle means