Accounting Concepts

GOING CONCERN Concept

Enterprise will continue in operation long enough to carry out its existing objectives.

Implications: depreciation and amortization are used, plant assets recorded at cost instead of liquidation value, items are labeled as fixed or long-term.

REVENUE RECOGNITION

• Revenue recognition principle

dictates that revenue should be

recognized in the accounting

period in which it is earned.

• When a sale is involved, revenue is recognized at the point of sale.

Money Measurement Concept: – only transaction data expressed in terms of

money can be included in the accounting records

Example: employee satisfaction and percent of international employees are not

transactions that should be included in the financial records.

. Customer Satisfaction

Percentage of International Employees

Salaries paid

Customer Satisfaction

Percentage of International Employees

Salaries paid

Should be includedin accounting recordsShould be includedin accounting records

COST Concept

• The cost principle dictates that assets be recorded at their cost.

• Cost is used because it is both relevant and reliable.

1) Cost is relevant because it represents a) the price paid, b) the assets sacrificed, or c)

the commitment made at the date of acquisition.

2) Cost is reliable because it is a) objectively measurable, b) factual, and c) verifiable.

Expense recognition is traditionally tied to revenue recognition.• referred to as the matching

principle • dictates that expenses be matched

with revenues in the period in which efforts are made to generate revenues.

MATCHING Concept

Dual aspect concept

• This concept sets up for us the basic accounting equation from which financial statements are derived.

• The Accounting Equation states that "total assets = total liabilities and equities"

Accounting period concept

Accrual concept

• The effects of transactions and other events are recognized when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.

Example : Accrual Concept

• Company A has received cash of Rs.40,000 from his customers. However, the company actually has done all work satisfactorily and the customers have acknowledged the work done which the company can billed for another Rs.20,000. Furthermore, the expenses for the Rs.20,000 work-done has been taken up into the books of account.

• Based on this concept, the company has actually completed all work done, also, the work done have being acknowledged by the customers, hence income of Rs.60,000 should be taken up and not just the cash received.

Objective Evidence concept

• Every transaction should be supported by Business documents as they act as valid proof .

• It prevents Errors & Frauds• It eliminates scope of personal biasness.

Conventions

• Materiality– relates to an item’s impact on a firm’s overall

financial condition and operations.

• Conservatism – dictates that when in doubt, choose the method that

will be the least likely to overstate assets and income

FULL DISCLOSURE

• Requires that circumstances and events that make a difference to financial statement users be disclosed.

• Compliance with the full disclosure principle

1) data in the financial statements

2) notes that accompanying the statements• Summary of significant accounting policies

usually the first note to the financial statements

Consistency

• Consistency means that the same accounting principles and methods should be used from year to year within a company.

• Example: Stock – LIFO/FIFO Depreciation – SLM/WDV