1/4/2022

FINANCIAL
ACCOUNTING
UNIT-1

DIVYA BANSARI
ATSS-CBSCA COLLEGE
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ACCOUNTING CONCEPTS
Business entity concept
Money measurement concept
GOING CONCERN CONCEPT
Accounting period concept
Accounting cost concept
Dual aspect concept
Matching concept
Realization concept
Accrual concept
• ACCOUNTING CONCEPTS
• Accounting concepts define the assumptions on the basis of
which financial statements of a business entity are
prepared.
• Concepts are those basic assumptions and condition which
form the basis upon which the accountancy has been laid.
• Business entity concept

• This concept assumes that, for accounting purposes, the

business enterprise and its owners are two separate
independent entities. Thus, the business and personal
transactions of its owner are separate. For example,
when the owner invests money in the business, it is
recorded as liability of the business to the owner.
Similarly, when the owner takes away from the business
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cash/goods for his/her personal use, it is not treated as

business expense.
• Money measurement concept
• This concept assumes that all business transactions must
be in terms of money, that is in the currency of a country.
In our country such transactions are in terms of rupees.
Thus, as per the money measurement concept,
transactions which can be expressed in terms of money
are recorded in the books of accounts. For example, sale
of goods worth Rs.200000, Rent Paid Rs.10000 etc. are
expressed in terms of money, and so they are recorded in
the books of accounts. But the transactions which cannot
be expressed in monetary terms are not recorded in the
books of accounts
• For example, sincerity, loyalty are not recorded in books
of accounts because these cannot be measured in terms
of money although they do affect the profits and losses
of the business concern.

• GOING CONCERN CONCEPT

This concept states that a business firm will continue to
carry on its activities for an indefinite period of time. Simply
stated, it means that every business entity has continuity of
life. Thus, it will not be dissolved in the near future. This is
an important assumption of accounting, as it provides a
basis for showing the value of assets in the balance sheet.
• Accounting period concept
• All the transactions are recorded in the books of accounts
on the assumption that profits on these transactions are
to be ascertained for a specified period. This is known as
accounting period concept. Thus, this concept requires
that a balance sheet and profit and loss account should
be prepared at regular intervals. This is necessary for
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different purposes like, calculation of profit, ascertaining

financial position, tax computation etc.
• Accounting cost concept
• It states that all assets are recorded in the books of
accounts at their purchase price, which includes cost of
acquisition, transportation and installation and not at its
market price. It means that fixed assets like building,
plant and machinery, furniture, etc are recorded in the
books of accounts at a price paid for them.
• Dual aspect concept
• Dual aspect is the foundation or basic principle of
accounting. It provides the very basis of recording
business transactions in the books of accounts. This
concept assumes that every transaction has a dual effect,
i.e. it affects two accounts in their respective opposite
sides. Therefore, the transaction should be recorded at
two places. It means, both the aspects of the transaction
must be recorded in the books of accounts.
• Thus, the duality concept is commonly expressed in terms
of fundamental accounting equation :
• Assets = Liabilities + Capital
• Matching concept
• The matching concept states that the revenue and the
expenses incurred to earn the revenues must belong to
the same accounting period. So once the revenue is
realised, the next step is to allocate it to the relevant
accounting period. This can be done with the help of
accrual concept If the revenue is more than the expenses,
it is called profit. If the expenses are more than revenue it
is called loss. This is what exactly has been done by
applying the matching concept.
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Therefore, the matching concept implies that all revenues

earned during an accounting year, whether received/not
received during that year and all cost incurred, whether
paid/not paid during the year should be taken into account
while ascertaining profit or loss for that year.
Significance :-
• 1. It guides how the expenses should be matched with
revenue for determining exact profit or loss for a
particular period.
• 2. It is very helpful for the investors/shareholders to
know the exact amount of profit or loss of the business.
• Realisation concept
• This concept states that revenue from any business
transaction should be included in the accounting records
only when it is realised. The term realisation means
creation of legal right to receive money. Selling goods is
realisation, receiving order is not. In other words, it can
be said that : Revenue is said to have been realised when
cash has been received or right to receive cash on the
sale of goods or services or both has been created.
• The concept of realisation states that revenue is realized
at the time when goods or services are actually
delivered.
• Let us study the following examples
• A Jeweler received an order to supply gold ornaments
worth Rs.500000. They supplied ornaments worth
Rs.200000 up to the year ending 31st December 2005
and rest of the ornaments were supplied in January
2006. The revenue for the year 2005 for a Jeweler is
Rs.200000. Mere getting an order is not considered as
revenue until the goods have been delivered.
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• Bansal sold goods for Rs.1,00,000 for cash in 2006 and

the goods have been delivered during the same year The
revenue for Bansal for year 2005 is Rs 100000
• Accrual concept
• The meaning of accrual is something that becomes due
especially an amount of money that is yet to be paid or
received at the end of the accounting period. It means
that revenues are recognized when they become
receivable. Though cash is received or not received and
the expenses are recognised when they become payable
though cash is paid or not paid. Both transactions will be
recorded in the accounting period to which they relate.
• Therefore, the accrual concept makes a distinction
between the accrual receipt of cash and the right to
receive cash as regards revenue and actual payment of
cash and obligation to pay cash as regards expenses.
The accrual concept under accounting assumes that
revenue is realised at the time of sale of goods or
services irrespective of the fact when the cash is
received.
• ACCOUNTING CONVENTIONS
Consistency
Full Disclosure
Materiality
Conservatism
• ACCOUNTING CONVENTION
• An accounting convention refers to common practices
which are universally followed in recording and
presenting accounting information of the business entity.
Conventions denote customs or traditions or usages
which are in use since long. To be clear, these are nothing
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but unwritten laws. The accountants have to adopt the

usage or customs, which are used as a guide in the
preparation of accounting reports and statements. These
conventions are also known as doctrine.
• Convention of consistency
• The convention of consistency means that same
accounting principles should be used for preparing
financial statements year after year. A meaningful
conclusion can be drawn from financial statements of the
same enterprise when there is comparison between them
over a period of time. But this can be possible only when
accounting policies and practices followed by the
enterprise are uniform and consistent over a period of
time. If different accounting procedures and practices are
used for preparing financial statements of different years,
then the result will not be comparable.
• Convention of full disclosure
• Convention of full disclosure requires that all material
and relevant facts concerning financial statements should
be fully disclosed. Full disclosure means that there
should be full, fair and adequate disclosure of accounting
information. Adequate means sufficient set of
information to be disclosed. Fair indicates an equitable
treatment of users. Full refers to complete and detailed
presentation of information. Thus, the convention of full
disclosure suggests that every financial statement should
fully disclose all relevant information. Let us relate it to
the business.
• The business provides financial information to all
interested parties like investors, lenders, creditors,
shareholders etc. The shareholder would like to know
profitability of the firm while the creditor would like to
know the solvency of the business. In the same way,
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other parties would be interested in the financial

information according to their requirements. This is
possible if financial statement discloses all relevant
information in full, fair and adequate manner.
• Convention of materiality
• The convention of materiality states that, to make
financial statements meaningful, only material fact i.e.
important and relevant information should be supplied to
the users of accounting information. The question that
arises here is what is a material fact. The materiality of a
fact depends on its nature and the amount involved.
Material fact means the information of which will
influence the decision of its USER.
• Convention of conservatism
• This convention is based on the principle that “Anticipate
no profit, but provide for all possible losses”. It provides
guidance for recording transactions in the books of
accounts. It is based on the policy of playing safe in
regard to showing profit
• The main objective of this convention is to show
minimum profit. Profit should not be overstated. If profit
shows more than actual, it may lead to distribution of
dividend out of capital. This is not a fair policy and it will
lead to the reduction in the capital of the enterprise.
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QUESTION FOR SELF STUDY

• What is financial accounting? Explain in brief the scope
of financial accounting.
• Define the term Accounting Principle. State the
important characteristics of accounting principles.
• What are accounting conventions? Briefly explain-
• Materiality
• Conservatism and consistency
4) Differentiate between-
• Book keeping and accounting
• Solvent and insolvent
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• Personal account and impersonal account

• Accounting concepts and accounting conventions
• Trade discount and cash discount