Accounting Conventions and Accounting Concepts

(1) Relevance



The convention of relevance emphasizes the fact that only such information should be made available by accounting as is relevant and useful for achieving its objectives. For example, business is fervent in luminous as to what has been total labor cost? It is not alive to in incandescent how remarkable employees use and what they achieve.



(2) Objectivity



The convention of objectivity emphasizes that accounting information should be measured and expressed by the standards which are commonly acceptable. For example, stock of goods lying unsold at the destroy of the year should be valued as its cost impress not at a higher brand even if it is likely to be sold at higher imprint in future. Reason is that no one can be definite about the tag which will prevail in future.



(3) Feasibility



The convention of feasibility emphasizes that the time, labor and cost of analyzing accounting information should be compared vis-à-vis relieve arising out of it. For example, the cost of 'oiling and greasing' the machinery is so slight that its break-up per unit produced will be meaningless and will amount to wastage of labor and time of the accounting staff.



Accounting Concepts



(1) Materiality



It refers to the relative importance of an item or event. Those who obtain accounting decisions continually confront the need to perform judgments regarding materiality. Is this item colossal enough for users of the information to be influenced by it? The essence of the materiality opinion is : the omission or misstatement of an item is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying on the picture would have been changed or influenced by the inclusion or correction of the item.



(2) Accounting period



Though accounting practice believes in continuing entity plan i.e. life of the business is perpetual but collected it has to recount the 'results of the activity undertaken in specific period (normally one year) . Thus accounting attempts to expose the gains or losses earned or suffered by the business during the period under review. Normally, it is the calendar year (1st January to 31st December) but in other cases it may be financial year (1st April to 31st March) or any other period depending upon the convenience of the business or as per the business practices in country concerned.



Due to this thought it is significant to bewitch into epic during the accounting period, all items of revenue and expenses accruing on the date of the accounting year. The pickle confronting this belief is that edifying allocation should be made between capital and revenue expenditure. Otherwise the results disclosed by the financial statements will be affected.



(3) Realization



This idea emphasizes that profit should be considered only when realized. The ask is at what stage profit should be deemed to have accrued? Whether at the time of receiving the order or at the time of execution of the order or at the time of receiving the cash. For answering this inquire of the accounting is in conformity with the law (Sales of Goods Act) and recognizes the principle of law i.e. the revenue is earned only when the goods are transferred. It means that profit is deemed to have accrued when 'property in goods passes to the buyer' viz. when sales are affected.



(4) Matching



Though the business is a continuous affair yet its continuity is artificially split into several accounting years for determining its periodic results. This profit is the measure of the economic performance of a worry and as such it increases proprietor's equity. Since profit is an excess of revenue over expenditure it becomes primary to bring together all revenues and expenses relating to the period under review. The realization and accrual concepts are essentially derived from the need of matching expenses with revenues earned during the accounting period. The earnings and expenses shown in an income statement must both refer to the same goods transferred or services rendered during the accounting period. The matching opinion requires that expenses should be matched to the revenues of the appropriate accounting period. So we must resolve the revenue earned during a particular accounting period and the expenses incurred to catch these revenues.



(5) Entity



According to this thought, the task of measuring income and wealth is undertaken by accounting, for an identifiable Unit or Entity: The unit or entity so identified is treated different and sure from its owners or contributors. In law the distinction between owners and the business is drawn only in the case of joint stock companies but in accounting this distinction is made in the case of sole proprietor and partnership firm as well. For example, goods musty from the stock of the business for business purposes are treated as a business expenditure but similar goods customary by the proprietor i.e. owner for his personal employ are treated as his drawings. Such distinction between the owner and the business unit has helped accounting in reporting profitability more objectively and fairly. It has also led to the development of "responsibility accounting" which enables us to catch out the profitability of even the different sub-units of the main business.



(6) Stable Monetary Unit



Accounting presumes that the purchasing power of monetary unit, say Rupee, remains the same throughout. For example, the intrinsic worth of one Rupee is same and equal in the year 1,800 and 2,000 thus ignoring the enact of rising or falling purchasing power of monetary unit due to deflation or inflation. In spite of the fact that the assumption is unreal and the practice of ignoring changes in the value of money is now being extensively questioned, collected the alternatives suggested to incorporate the changing value of money in accounting statements viz., fresh purchasing power device (CPP) and unusual cost accounting map (CCA) are in evolutionary stage. Therefore, for the time being we have to be remark with the 'stable monetary unit' notion.



(7) Cost



This thought is closely related to the going pain idea. According to this, an asset is ordinarily recorded in the books at the note at which it was acquired i.e. at its cost imprint. This 'cost' serves the basis for the accounting of this asset during the subsequent period. This' cost' should not be confused with 'value'.



It must be remembered that as the proper worth of the assets changes from time to time, it does not mean that the value of such an assets is wrongly recorded in the books. The book value of the assets as recorded do not consider their precise value. They do not signify that the values famed therein are the values for which they can be sold. Though the assets are recorded in the books at cost, in course of time, they become reduced in value on story of depreciation charges. In sure cases, only the assets like 'goodwill' when paid for will appear in the books at cost and when nothing is paid for, it will not appear even though this asset exists on name and fame created by a anxiety.



Therefore, the values attached to the assets in the balance sheet and the derive income as shown in the Profit and Loss legend cannot be said to mediate the accurate measurement of the financial situation of an undertaking, as they do not have any relation to the market value of the assets or their replacement values. This notion that the transactions should be recorded at cost rather than at a subjective or arbitrary value is known as Cost view. With the passage of time, the market value of fixed assets like land and buildings vary greatly from their cost.



These changes or variations in the value are generally ignored by the accountants and they continue to value them in the balance sheet at historical cost. The principle of valuing the fixed assets at their cost and not at market value is the underlying principle in cost notion. According to them, the unusual values alone will fairly narrate the cost to the entity.



The cost principle is based on the principle of objectivity. The supporters of this plot argue so long as the users of the financial statements have confidence in the statements, there is no necessity to change this plot.



(8) Conservatism



This notion emphasizes that profit should never be overstated or anticipated. Traditionally, accounting follows the rule "anticipate no profit and provide for all possible losses. For example, the closing stock is valued at cost heed or market stamp, whichever is lower. The enact of the above is that in case market impress has advance down then provide for the 'anticipated loss' but if the market brand has gone up then ignore the 'anticipated profits'.



Critics point out that conservation to an excess degree will result in the creation of secret reserve. This will be quite contrary to the doctrine of disclosure. However, conservatism to a reasonable degree may not near in for criticism.



Accounting Equation



Dual view may be stated as "for every debit, there is a credit." Every transaction should have two sided do to the extent of same amount. This thought has resulted in Accounting Equation which states that at any point of time the assets of any entity must be equal (in monetary terms) to the total of owner's equity and outsider's liabilities. This may be expressed in the beget of equation:



A-L = P



where



A stands for assets of the entity;



L stands for liabilities (outsider's claims) of the entity; and



P stands for Proprietor's claim (Capital) on the entity.



(The effect of presentation of equation A-L = P is consistent with the right interpretation of financial set. Thus it emphasizes that properly speaking the proprietary claim is the balance after providing for outsider's claims against the business from the total assets of the business) .