Accounting conventions and accounting principles

(1) Relevance

The Convention emphasizes the importance that this information should only be provided by the accounting is relevant and useful to achieve its objectives. For example, business is interested in knowing about what was the total labor costs? Is not interested in knowing how much employees spend and what to save.

(2) Objectivity

The objective of the Convention states that the accounting information must be measured and expressed by the rules that are commonly acceptable. For example, stocks of unsold goods lying at the end of the year should be valued as its price does not cost a higher price, although it is likely to be sold at higher price in the future. The reason is that nobody can be sure of the price that will prevail in the future.

(3) Feasibility

The Convention stresses that the feasibility of time, labor and cost analysis of accounting information must be compared vis-à-vis the benefits arising from it. For example, the cost of 'oil and grease' the machine is so small that its break-up per unit of output will be meaningless and will amount to waste of labor and time accounting staff.

Accounting Concepts

(1) Relevance

It refers to the relative importance of an item or event. Those who make accounting decisions constantly confronted with the need to make judgments regarding materiality. This article was large enough for users of the information that must be influenced by it? The essence of the concept of materiality is as follows: the omission or misstatement of an item is material if, in light of the circumstances, the size of the item is such that it is probable that the judgment of a reasonable person relying on the report would have been changed or influenced by the inclusion or correction of the voice.

(2) Accounting period

Even if you believe in the accounting practice to continue the life that is to say an entity concept of business is perpetual, but still must report the 'results of the activity in a particular period (usually one year). Thus attempts to present the accounting profits or losses earned or incurred by the sector during the period under review. Normally, it is the calendar year (January 1 to December 31) but in other cases it may be the year (April 1 to March 31) or at any other period depending on the convenience of the business or the business practices in the country in question.

Because of this concept must be taken into account during the accounting period, all items of income and expenses arising on the date of the accounting year. The problem that arises is this concept that the proper allocation should be made between capital expenditure and revenue. Otherwise, the results announced in the budget will be affected.

(3) Realization

This concept emphasizes that profit should only be considered if made. The question is at what level of profit should be considered to have accrued? If upon receipt of order or at the time of order or upon receipt of the money. To answer this question, the accounting is in accordance with the law (Sale of Goods Act) and recognizes the principle of law that is to say the revenue is earned only when the property was transferred. This means that the profit gained when one considers 'ownership of goods passes to the buyer' ie. when sales are concerned.

(4) Correspondence

Even if the business is a business continues its continuity is artificially divided into different exercises to determine the results periodically. Profit is the measure of economic performance of a problem and as such increases capital owner. Since profit is an excess of income over expenditure is necessary to gather all the receipts and expenditures for the period under review. The realization and accrual concepts are essentially derived from the need to match expenses with revenues earned during the accounting period. The revenue and expenditure mentioned in the statement must relate both to the same property transferred or services rendered during the accounting period. The concept of matching requires that the expenditure must correspond to the revenue of the appropriate accounting period. So we must determine the income earned during a particular accounting period and the expenses incurred to earn such revenue.

(5) Entity

According to this concept, the task of measuring income and wealth is made by accounting for an identifiable unit or entity: the unit or entity so identified is considered to be different and distinct from its owners or employees. In law the distinction between owners and the business is only used in case of limited companies, but which represent this distinction is made in the case of sole proprietorship and partnership firms, as well. For example, assets used by the business magazine for business purposes are treated as a business expenditure, but similar goods used by the holder or owner for his personal use is treated as his drawings. This distinction between the owner and the business unit has helped accounting in reporting profitability more objectivity and balance. It has also led to the development of "responsibility accounting" that allows us to detect even the viability of various sub-units of the core business.

(6) stable monetary unit

Accounting assumes that the purchasing power of the currency, say rupee, remains the same everywhere. For example, the intrinsic value of a rupee is the same and equal to the year 1800 and 2,000 thus ignoring the effect of increasing or decreasing the purchasing power of the currency due to inflation or deflation. Despite the fact that the hypothesis is unreal and the practice of ignoring changes in the value of money is now widely questioned, yet the alternatives suggested to integrate the value of money in return and that the financial statements., The current method of power Purchase (CPP) and the current method of cost accounting (CCA) are evolving. Therefore, for the moment we must content ourselves with the concept of 'stable monetary unit'.

(7) Cost

This concept is closely tied to the concept of business continuity. According to this, an asset is normally recorded in the books at the price at which you purchased that is to say to his cost. The 'cost' is the basis for the accounting for that activity during the subsequent period. The 'cost' should not be confused with the 'value'.

It should be noted that, as the actual value of property changes from time to time, this does not mean that the value of such an activity is erroneously recorded in the books. The book value of assets recorded as not reflect their real value. It does not mean that the values ​​found in it are the values ​​that can be sold. Even if the activities are recorded in the books at cost, over time, may have fallen in value because of depreciation. In some cases, only those activities as 'goodwill' paid, will appear in the books at cost and when it is paid, will not display even if that heritage exists on the name and fame created a concern.

Therefore, the values ​​attached to the assets in the balance sheet and net income, as shown in the profit and loss can not be said to reflect the correct measurement of a company's financial position, as they have no relation with the market value goods or their replacement values. This idea that the operations must be carried at cost, rather than an arbitrary or subjective value concept is known as cost. Over time, the market value of assets such as land and buildings vary greatly from their cost.

These changes or changes in value are generally ignored by accountants and continue to value on the balance sheet at historical cost. The principle of valuation of fixed assets at cost rather than at market value is the fundamental principle in the concept of cost. According to them, the current values ​​alone, rather than represent the cost to the entity.

The principle cost is based on the principle of objectivity. Proponents of this method argue until financial statement users have confidence in the statements, there is no need to change this method.

(8) Conservatism

This concept emphasizes that profit should never be exaggerated or anticipated. Traditionally, the accounting follows the rule of "no profit to anticipate and predict all the possible losses. For example, the closing stock is valued at cost price or market price, whichever is less. The effect of the above is that in If the market price fell to engage in the 'expected loss', but if the market price has gone up, so ignore the' expected profits.

Critics point out that the retention to a degree in excess leads to the creation of secret reserves. This is completely contrary to the doctrine of disclosure. However, at a reasonable level of conservatism can not be criticized.

Accounting Equation

Dual concept can be stated as "for every debit, there is a credit." Every transaction is expected to take effect two sides to the extent the same amount. This concept has resulted in fundamental accounting equation which states that at any point of time the activities of any size must be equal (in monetary terms) of the total equity and liabilities stranger. This can be expressed in the form of equation:

A-L = P

where

A stands for the activity of;

L is for liabilities (foreign loans) entity, and

P stands for affirmation owner (Capital) on the entity.

(The form of presentation of the equation P = AT is consistent with the legal interpretation of financial position. So points out that strictly speaking the alleged owner is the balance after providing for the claims of outsiders against the total business activities of the business) .......