Accounting Concepts and Conventions

                Accounting concepts and conventions

The following concepts and conventions are the principles guiding the preparation of accounting statements. If any of them is disregarded, it might affect the entire nature financial accounting:

           Entity concept:

 The owners and  the business are treated as separate entities. Only things that affect the business must be recorded because separate accounts are kept for companies, as distinguished from the owners. 

Going concern concept:

 The business will continue to operate for an indefinitely long period in the future and no major part will be disposed off.

Cost concept: 

 The value of assets are shown at the cost of acquisition and not the current value of  current value of the assets.

Dual aspect concept:

 All transactions have two aspects, i.e, one debit and one credit.

Periodicity concept:

 In accounting, activities are measured at specified interval of time e.g monthly, quarterly, annually et.c.

Realization concept:

 Revenue is recognized as soon as goods are passed to customers in exchange for valuable considerations.

Matching concept:

 All the expenses are matched against the revenue generated at that period.

Conservatism:

  (a) All income should be anticipated and all possible losses should be provided for.

  (b) If an accountant is given two methods of asset valuation, he should choose the lower value.

Money measurement:

 All information present in the financial statement must be capable of being expressed in monetary terms.

    Accrual concept: Revenues and expenses are recognized and included in the income statement as they are accrued not as they are paid or received.

 Consistency: Identical transactions in the same period must be treated using the same method.

Materiality Concept: Amount of material values are recorded. Certain economic events should not be reported if they are not significant.

              Features of Accounting Information

          Simplicity:

 Accounting information must be simple.

  Relevance:

    Accounting information must be useful and relevant in order to assist the      interested     user in decision making.

Understandability:

 This means the expression of  the accounting information must be clear  in such a way that all the interested users of the information, both internal and external users, will be able to understand it.

  
Reliability:

 The accounting information provided must be truthful, reliable and accurate. The information should be brought with honesty.

Comparability:

  This means the ability for users of the information to be able to compare identical and similar firms in the same industry group and to compare and contrast the performance over time. Some of the work that goes into setting all accounting standards is based on the need for comparability.

Consistency:

This means consistent treatment of identical and similar items and application of the accounting policies.

Objectivity:

 This means that accounting information presented should be prepared and reported in a very "neutral" way. It is not biased towards a particular group of interested users.