Introduction to

Accounting Concepts
and Conventions
Accounting concepts and conventions form the foundation of
financial reporting and decision-making.

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by usha rani
Fundamental Accounting Concepts
1. Business entity concept: Separates the business from its owner's personal transactions.
2. Money measurement concept: Requires transactions to be recorded in terms of currency.
3. Going concern concept: Assumes the business will continue operating indefinitely.
4. Accounting period concept: Necessitates preparing financial statements at regular intervals to
determine profits and financial position.

These foundational concepts provide the framework for consistent, reliable accounting practices.
In-depth Understanding of Accounting
Concepts
The accounting cost concept states that assets are recorded at their purchase price, including acquisition,
transportation, and installation costs, rather than market price. This ensures consistency in financial
reporting.
The dual aspect concept is the foundation of accounting. It assumes every transaction has two effects,
recorded on opposite sides. This forms the basis of the fundamental accounting equation: Assets = Liabilities
+ Capital. The duality principle is essential for maintaining the balance and integrity of financial records.
Detailed Explanation of Matching and
Realisation Concepts
Matching Concept Realisation Concept

The matching concept states that revenue and the The realization concept states that revenue should
expenses incurred to earn that revenue must only be recorded when it is realized, meaning the
belong to the same accounting period. This is legal right to receive money has been created.
achieved through the accrual concept - if revenue Mere receipt of an order does not constitute
exceeds expenses, it is profit; if expenses exceed realization; revenue is realized when goods or
revenue, it is a loss. services are delivered. Examples illustrate the
application of the realization concept.
Accrual Concept and Continuation
Accrual Concept Revenue and Expenses

The accrual concept distinguishes between the Under the accrual concept, revenue is recognized
accrual receipt of cash and the right to receive when earned, regardless of when cash is received.
cash for revenue, as well as the actual payment of Similarly, expenses are recognized when incurred,
cash and the obligation to pay cash for expenses. even if cash has not yet been paid. This ensures
that financial statements accurately reflect a
company's performance and financial position
during an accounting period.

The accrual concept is a fundamental principle that enables the matching of revenues and expenses,
providing a more meaningful representation of a business's activities.
Accounting Conventions
Consistency Full Disclosure
Accounting conventions ensure that a business entity The full disclosure convention requires that all material
follows the same accounting principles and methods over information about a business's financial position and
time. This consistency allows for meaningful comparisons performance be presented transparently in the
of financial information across different accounting accounting reports and statements.
periods.

Materiality Conservatism
The materiality convention states that only information The conservatism convention dictates that accountants
that is significant or relevant to the users of financial should exercise prudence and caution when making
statements should be reported. This ensures that the judgments and estimates. This helps to prevent the
most important details are highlighted and emphasized. overstatement of assets and income, and the
understatement of liabilities and expenses.

These accounting conventions ensure the reliability, transparency, and prudence of financial reporting, enabling meaningful
analysis and decision-making.
Convention of Consistency and Full Disclosure
The convention of consistency requires using the same accounting principles and practices year over year. This
enables meaningful comparisons of a company's financial statements over time. Inconsistent accounting methods
across periods make the results incomparable.

The convention of full disclosure mandates that financial statements provide complete, fair, and adequate
disclosure of all material and relevant facts. This ensures interested parties like investors, lenders, and shareholders
receive the information they need to make informed decisions about the company's profitability, solvency, and
overall financial health.
Convention of Materiality and Conservatism
Materiality Conservatism

The convention of materiality states that only The convention of conservatism, or "playing safe",
important and relevant information should be provides guidance for recording transactions. Its
included in financial statements to make them main objective is to avoid overstating profits. This
meaningful. Materiality depends on the nature and convention mandates that profit should not be
amount of the fact - information that would recorded until realized, but provision should be
influence a user's decision is considered material. made for anticipated losses. Examples include
valuing inventory at the lower of cost or market,
creating allowances for doubtful debts, and writing
off intangible assets. Conservatism is useful in
situations of uncertainty.