Saturday, 3 December 2011

introduction to concepts and conventions of accounting:)

various accounting principles and concepts.

introduction: ~BOOKKEEPING(process of recording data) is based on a system called double entry system:) (debit/credit). in accounting a certain guidelines or rules must be followed before the final accounts prodeced. (means that in accounting there's a fixed format)

basic accounting concepts:)
~there's few concepts in accounting. 
which is:

  1. entity concepts:Basic accounting principle under which a business ororganization is deemed as an entity in its own regard, separate from its stockholders (shareholders), managers, or proprietor. Also called entity assumption. ~the items recorded in a business's book are limited to transaction that affect the business only. the record and reports should not include either transaction or asset that other than the business.
  2. goin concern:The 'going concern' concept in accounting is an assumption that the business will continue to exist for the foreseeable future. Accountants adopt the 'going concern' concept so they can prepare realistic financial reports. Without the 'going concern' concept, accountants would have to write off all assets in the current period including long term assets that still have an economic benefit for future periods.(Financial statements are prepared assuming that the company is a going concern which means that the company intends to continue its business and is able to do so.)
  3. money measurement/monetary unit assumption:Accounting is the language of business and numbers are its letters. Through accounting we can communicate only those accounting transactions and other events which can be expressed in monetary units. This is called monetary unit assumption.One aspect of the monetary unit assumption is that currencies lose their purchasing power over time due to inflation, but in accounting we assume that the currency units are stable in value. This is alternatively called stable dollar assumption.(monetary unit is the most effective means of expressing to interested parties changes in capital, and exchanges of godds and services.)
  4. periodicity/accounting period:Although businesses intend to continue in long-term it is always helpful to account for their performance and position based on certain time periods because it provides timely feedback and helps in making timely decisions.Under time period assumption, we prepare financial statements quarterly, half-yearly or annually. The income statement provides us an insight into the performance of the company for a period of timeThe statement of cash flows and the statement of changes in equity provide detail of how the company's financial position changed during the time period.
  5. historical cost:Accounting is concerned with past events and it requires consistency and comparability that is why it requires the accounting transactions to be recorded at their historical costs. This is called historical cost concept.Historical cost is the amount of resources given up to acquire the asset or consume the service or the amount of liability incurred.In subsequent periods when there is appreciation is value, the value is not recognized as an increase in assets value except where otherwise required by the standards. example:100 units of an item were purchased one month back for $10 per unit. The price today is $11 per unit. The inventory shall appear on balance sheet at $1,000 and not at $1,100.
  6. consistency:in accounting this concepts deals with the consistent use of ACCOUNTING BASIS for METHODS. FOR EXAMPLE:once a business has adopted the straight line method,this  method should be used both within one accounting period and from one accounting period to another.
  7. accural/matching concepts:Business transactions are recorded when they occur and not when the related payments are received or made. This concept is called accrual basis of accounting and it is fundamental to the usefulness of financial accounting information.In order to reach accurate net income figure the expenses incurred in earnings revenues recognized in a time period should be recognized in that time period and not in the next or previous. This is called matching principle.
  8. realization/revenue recognation principal:Revenue recognition principle tells that revenue is to be recognized only when the rewards and benefits associated with the items sold or service provided is transferred, where the amount can be estimated reliability and when the amount is recoverable.
    Accrual basis of accounting is used in recognizing revenue which tells that revenue is to be recognized ignoring when the cash inflows occur.


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