Management - 4

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As Per Updated Syllabus

UGC - NET
MANAGEMENT
UNIT - 4
Unit - 4

Unit-4
Management - IV

1. ACCOUNTING PRINCIPLES AND STANDARDS


1.1 Accounting Principles
Accounting as language of business disseminate the financial nature information in
relation to a business enterprise which is of prime importance for different users i.e.
internal and external users like departments suppliers creditors employee,
government, investors etc. accounting information must be free from any kind of
personal biases and confusion and should be comparable. It becomes inevitable on
the part of managers to ensure the transfer of information with the same meaning as
they intended to and in the same sense. Hence the need for uniform financial
reporting leads to development of accounting principles.
Accounting principle board states that "generally accepted accounting principle
incorporate the consensus at any time as to which economic resources and
obligations are recorded as assets and liabilities, any changed in them should be
recorded, what financial information should be disclosed and which financial
statement should be prepared.
Accounting principles refers to the uniform practices that organizations need to
follow while recording, preparing and presenting the financial statement of company
so as to bring uniformity in financial reporting and ensure easy understanding of
accounting information by all given in financial statements.

Features of Accounting Principles


• Accounting principles are man-made and derived from experience over the
time period.
• Accounting principles are flexible not rigid incorporate changes in
environment from time to time.
• Popularly known as "generally accepted accounting principles.
• Facilitate the comparison of financial statement of two entities
• Ensure true and fair view of state of affairs of entity.

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• Also include various procedures of applying these principle GAẠP are like
ground rule of accounting ensure similar recording of accounting transaction
by all.
• Accounting principle goes through ongoing development process whenever
environment change and new needs of society evolves.
• These are not final statement subject to modification depending upon change
in business practices.
• Accounting principles and there acceptability depends upon following factor
:
(a) Relevance
(b) Objectivity
(c) Feasibility.
Significance of Accounting Principles
• Identify various items as income, expanse, assets etc.
• Facilitate the presentation of various accounting items in financial statements
• Clarify what should be recorded and what shouldn't be.
• Ensure true and fair view of affairs of company.
• Ensure comparability and consistency of financial statement

Accounting principles can be manifested in detail via accounting concept and


accounting conventions.

1.2 Accounting Concepts


Accounting concepts are basic assumptions regarding environment where
accounting functions. It serves as base for various methods and procedures of
accounting used to records the transactions.
Concepts are general opinion or idea about the way transaction are to be recorded.
No verification is required as these are just assumption. Accounting concepts are :
Original Concept : Those are indigenous to accounting itself i.e. concept of retained
earnings Borrowed Concept : those are borrowed from other disciplines i.e.
opportunity cost Following are the accounting concepts :
(a) Business Entity Concept : according to this concept business and owner are two
separate entities. Owner capital invested in business is a liability for business.
Personal transactions of owner doesn't affect the financial position of business entity.

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(b) Money Measurement Concept : as per this concept only those transactions are
recorded in books of accounts which can be measured in terms of money. Money as
a common measuring unit can be a currency of any country i.e. * in India. Non-
monetary transactions are not included in book of accounts.
(c) Going Concern Concept : as per this concept business assumes to be establishes
for an indefinite period in future it will going to be liquidated in near future hence
business has unlimited life and its activities continue to happen in future.
(d) Periodicity Concept : it state that the long or unlimited life of business is divided
into certain time duration called accounting period or financial year at the end of
which financial statement are prepared to show the results of business and financial
position i.e. profit and loss account, balance sheet. Thus financial reporting at the
end of life of business is no use for managers and other concerned users of financial
statement. Periodical progress is of more utility for all users.
(e) The Cost Concept : cost concept states that assets are recorded in book of account
at their cost price not at the market value. The original cost or acquisition cost of
assets is shown in books of accounts also called historical cost. E.g. a company buy
a machine for 10 lakh but market value is 20 lakh then it recorded at cost price i.e. *
10 lakh. Similarly items that doesn't have any cost need not to be recorded i.e. self-
generated goodwill.
(f) Realisation Concept : when do we recognized the revenue ? At what point of time
we should recognize the revenue ? As recognition/measurement at different point of
time has significant impact on financial results of a particular accounting period.
There must be common measurement criteria relating to timing of recognizing the
revenue.
Realisation concept specify that revenues are recognize and recorded when they
have been realized hence revenues are recoded only when they actually earned by
enterprise or at a time when cash has been received.
(g) The Accrual Concept : as per the accrual concepts revenue are recoded in books
of accounts at the moment they earned weather received in cash or not. Similarly
expanses are recorded in the accounting period they incurred by enterprise weather
cash is paid or not. Hence the recognition of income and expenses doesn't depends
upon the receipt or payment of cash rather both are as the transaction happen.
(h) Matching Concept : it simply state about the matching of revenue and
expenditure for an accounting to which they actually belong to. Revenue and
expanses items shown in income statement must belong to the accounting for which
income is to be calculated. To calculate the net profit for an accounting period we
must only take into account those expenses an incomes related to that accounting

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period. Thus the essence is revenue and expanses must be matched to the accounting
period for which income is going to be calculated.

1.3 Accounting Conventions


It refers to generally accepted practices or customs based on general agreement
between parties.
These are accepted methods, procedures or practice adopted by common consent
between parties for treatment of financial transactions and elements. E.g. to calculate
depreciation "straight line method", Valuation of closing inventory at cost price or
market price whichever is lower. Thus accounting conventions are rule of practice
or generally accepted methods or procedures agreed by concerned peoples. All in all
Conventions consist of various methods and procedures accepted by all.
Following are the accounting conventions :
(A) Consistency : It advocate about consistency of accounting procedures or method
to be followed year by year. Business enterprise need to be consistent in accounting
practices or procedures relating to treatment of accounting items. Because the
comparison of financial statement is possible only when same methods relating to
an item is followed each year.
E.g. straight line method to measure depreciation. Consistency brings uniformity in
accounting practices and reduce personal biases.
(B) Materiality Convention : It states that only those transaction are going to be
reported in books of accounts which are material or relevant. Relevant transaction
are those which has potential to influence financial decisions of shareholders i.e.
investors for company. It ensure meaningful financial statement and minimize cost
by considering only the material information.
(C) Full Disclosure Convention : It is related to the disclosure of financial statement
in full to facilitate decision making of investors it can be defined as "the
communication of financial information about the activities of business enterprise to
the interested parties to help in effective decision making.
It ensure financial reporting of results in full, fair and adequate. As all the relevant
and complete information which must include minimum set of information to make
it adequate and takes into account interest of all.

1.4 Accounting Standards


Accounting as language of business serve as communicator between businesses and
concerned parties may be internal or external. Its main objective to communicate
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