There are different
kinds of accounting concepts and
conventions in accounting worls.
THE VARIOUS KINDS OF CONCEPTS INCLUDE
i. GOING CONCERN CONCEPT
ii. BUSINESS ENTITY CONCEPT
iii. MATCHING OR ACCRUAL CONCEPT
This concept states that in an accounting period the earned income and the incurred cost which earned the income should be properly matched and reported for the period. This concept is also universally accepted in Manufacturing, Trading organization.
Points to considered when matching
1. Outstanding expenses though not paid for in cash are shown in the profit and loss accounts.
2. Prepaid expenses are not shown in profit and loss accounts
3. Income receivable should be added in the revenue
4. Income receivable in advance should be deducted from revenue
ii. BUSINESS ENTITY CONCEPT
iii. MATCHING OR ACCRUAL CONCEPT
This concept states that in an accounting period the earned income and the incurred cost which earned the income should be properly matched and reported for the period. This concept is also universally accepted in Manufacturing, Trading organization.
Points to considered when matching
1. Outstanding expenses though not paid for in cash are shown in the profit and loss accounts.
2. Prepaid expenses are not shown in profit and loss accounts
3. Income receivable should be added in the revenue
4. Income receivable in advance should be deducted from revenue
iv. RECOGNITION/REALISATION CONCEPT
Realization concept encourages the periodic recognition of revenue as soon as it can be measured and the value of the assets is reasonably certain
In realization the revenue are realized in three basis
1. Basis of cash
2. Basis of sale
3. Basis of production.
v. HISTORICAL COST CONCEPT
vi. DUAL ASPECT CONCEPT
This concept ensures that transaction are recorded in books at least in two accounts, if one account is debited it’s also credited with the same amount in a different account. The recording system is also known as double entry system. Assets = Liabilities + Capital.
vii. MONEY MEASUREMENT CONCEPT
THE VARIOUS KINDS
OF CONVENTIONS INCLUDE
i. CONSISTENCY: It states that accounting method used in one accounting period should be the same as the method used for events or transactions which are materially similar in other period (i.e. accounting practices should remain unchanged from period to period ). This also involves treatment of transaction and valuation method. Consistency is also advisable so that the comparison of accounting figures over time is meaningful. Consistency also states that if a change becomes necessary, the change and its effect should be clearly stated.
ii. MATERIALITY
According to AMERICAN ACCOUNTING ASSOCIATION, an item should be regarded as material if there is reason to believe that knowledge of it would influence decision of informed investors. An item is also considered material if its omission or misstatement could distort the financial statement such that it influences the economic decision of users taken on the basis of financial statement.
iii. PRUDENCE OR CONSERVATISM
This is an accounting practice that emphasizes great care in the anticipation of possible gains while possible losses are efficiently provided for. Prudence requires an accountant to attempt to ensure that the degree of success is not overstated. It also makes provision for possible bad and doubtful debts out of current year’s profit.
iv. OBJECTIVITY
This convention states that the financial statement should be made on verifiable evidence.
v. FULL DISCLOSURE
It states that information relating to the economic affairs of the enterprise which are of material interest should be clearly disclosed to the readers.