This GSEB Class 11 Commerce Accounts Notes Part 2 Chapter 6 Conventions, Assumption, Concepts and Principles of Accounting covers all the important topics and concepts as mentioned in the chapter.
Conventions, Assumption, Concepts and Principles of Accounting Class 11 GSEB Notes
Accounting system is based on some concepts, principles, postulates, conventions and assumptions. Accountants all over the world would agree on certain basic points on which accounting theory and practice is based being commonly referred to as accounting concepts and principles. They are considered as a broad set of conventions that are meant to provide basic frame work for financial reporting. The importance of these concepts and principles lies in the fact that they are related to the entire financial accounting process while they affect directly the way the financial reports or statements are prepared. Accountants need to apply professional judgements while preparing financial statements or reports, these concepts and principles help them to ensure that they are not being misled and that providing a true and fair view of financial statements is being accomplished.
In short, “In practice, they serve a very important function. Generally Accepted Accounting Principles (GAAPs) are a common set of accounting rules and standards that dictate how financial statements are prepared.”
→ Accounting concepts or principles are manmade.
→ As these principles are widely accepted and applied in practice by accountants, they are also known as Generally Accepted Accounting Principles or GAAPs.
→ Various accounting principles, concepts, conventions, postulates and assumptions are used while writing books of accounts and preparing financial statements.
→ Various concepts and its importance:
|1. Going concern concept||It is assumed that the business concern will continue for a long period and the same will not be closed or liquidated in the near future.|
|2. Consistency concept||While writing accounts or preparing financial statements, the same policies, procedures and methods should be followed Every year.|
|3. Accrual concept||Revenue or costs are accrued, i.e., recognized as they are earned or incurred and not only when cash is received or paid.|
|4. Accounting entity concept||The business will be treated quite separately from the owner of the business.|
|5. Money measurement concept||All business transactions are represented in the monetary unit in business. The transactions which cannot be measured in terms of money are not recorded in accounts.|
|6. Periodicity concept||Profit and Loss Account and Balance Sheet are prepared at the end of every accounting period. Usually, the accounting period is of 12 months.|
|7. Full disclosure concept||All material information should be disclosed in the financial statements and immaterial information may not be disclosed|
|8. Materiality Concept||Any information would be shown in detail in financial statements only when the same is useful to the users of such information.|
|9. Prudence concept||While preparing accounts, takes into account all anticipated loss but ignores anticipated gain or profit.|
|10. Cost concept||All assets are recorded in the books of accounts at their monetary cost of acquisition and not at its market price.|
|11. Dual aspect concept||Every transaction has two-fold effect or has a dual impact on the accounting records : (i) From the angle of benefit received and (ii) From the angle of benefit given.|
|12. Matching cost with revenue concept||Cost incurred during a particular period should be matched against the revenue of that period to ascertain profit or loss.|
|13. Realisation or Revenue recognition concept||Revenue should be recognised in the period in which it is earned irrespective of the fact whether cash is received or not during that period.|
|14. Verifiability and objectivity of evidence||There should be objective evidence, for transactions recorded in accounts, which are capable of verification.|
→ The International Accounting Standards Committee (IASC) and the Institute of Chartered Accountants of India (ICAI) treats the following three concepts as the fundamental accounting assumptions :
- Going concern concept
- Consistency concept
- Accrual concept