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Accounting Principles PowerPoint PPT Presentation


Here the Backbone of Accounting has been discussed. The Generally Accepted Accounting Principles which are generally followed round the globe which includes few Fundamental Accounting Assumptions (which are presumed to be followed by every Accountant). The Basis of Accounting & the Accounting Concepts has been explained elaborately. Some Accounting policies & Estimates are discussed

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Accounting Principles

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Takshila learning learn anything anywhere www takshilalearning com call 91 8800999280

Takshila LearningLearn anything anywherewww.takshilalearning.comcall: +91-8800999280


Generally accepted accounting principles

Generally Accepted Accounting Principles

The Backbone of Accounting Information system,

Accounting Assumptions.

Accounting Concepts/Conventions.

Accounting Standards.

( Accounting Principles are the doctrines behind the application of accounting concepts/practices)


Fundamental accounting assumptions

Fundamental Accounting Assumptions


Consistency

Consistency

  • Meaning : Accounting policy chosen should be consistently applied

  • Example: ABC Ltd. uses WDV method of Depreciation, year after year.

  • Objective: Comparability, Understandability


Accrual

Accrual

  • A Basis of Accounting.

  • Transactions are recorded as per its accrual/not on realization.

  • Expenses are recognized on its incurrence, not when paid

  • Incomes are recognized when earned, not received.


Basis of accounting

Basis of Accounting

Accrual basisCash Basis

  • Recording in the period of - Recording in the period of

    transaction accrued (Cash/Credit) receipt/payment of Cash

  • Distinction of Capital/Revenue - No such distinction

    transactions

  • Capital Transactions (Balance Sheet)

    Revenue transactions (P & L A/c)

  • Eg. P & L A/c, - Eg. Cash, Bank, Receipts Income & Expenditure A/c & Payments A/c


Going concern

Going Concern

The business will go on forever, It will never end either intentionally or unintentionally.

Due to this concept, the Assets/Liabilities have been divided into Fixed/Current.


Fundamental accounting assumptions1

Fundamental Accounting Assumptions

As per Accounting Standard 1

“ Disclosure of Accounting Policies”

Accounting Assumptions are not to disclosed (if followed)


Accounting concepts

Accounting Concepts

Business Entity Money MeasurementDual Aspect

Historical CostConservatism

MatchingPeriodicity

MaterialityFull Disclosure

Revenue Recognition


Business entity concept

Business Entity Concept

Owner & the business Entity are separate persons

Personal assets/liabilities not included in business accounting

Personal expenses from business- “Drawings”

Capital by owner- “Liability” for business


Historical cost conept

Historical Cost Conept

Asset/Liability – recorded at ORIGINAL COST

Market Value/Time value of money- not considered.

Original Cost= Purchase Cost + Capital Expenditure


Money measurement concept

Money measurement Concept

Transactions/Eventsmeasurable in Money are only considered

Only Quantitative transactions (No Qualitative)

Items, not in money terms “ not a transaction at all”- should not be recorded


Money

Money

A scale/standard of measurement

  • Limitations:

    1. No universal denomination.

    2. Not stable in the dimension

    3. Not an exact measurement discipline

  • Elements :

  • Identification of objects & events to be measured

  • Selection of standard or scale to be used.

  • Evaluation of dimension or measurement standard or scale.


Valuation principles

Valuation Principles

Historical CostRealizable value

Current/Replacement Cost

Present Value

(as per time value of money)

Note : Future Value is ignored


Periodicity concept

Periodicity Concept

Concept of definite accounting period

An accounting period is to be selected (as business life is indefinite)

Helps in :

  • Comparison (Intra Firm/Inter Firm)

  • Uniformity/Consistency

  • Matching


Matching concept

Matching Concept

The periodical revenues earned & expenses incurred should be matched.

Helps in compiling P & L A/c


Dual aspect concept

Dual Aspect Concept

  • Also known as “ Double Entry System”

  • Every transaction or event has two aspects

    (Debit & Credit)

    or affect at least two accounts.

  • For every Debit, there is an equal credit, for every credit, there is an equal debit.

  • Verification: “Accounting Equation”

    (Based on Balance Sheet)

    “Capital + Liabilities = Assets”


Conservatism concept

Conservatism Concept

Prudence Concept (being Cautious)

“Do not anticipate the probable incomes/profits, but provide for all the probable losses

leads to understatement of assets

(Cost /Market Value, whichever is lower)

Contradicts Cost Concept


Materiality

Materiality

Items having significant effects

(relevant for decision makers)

Should be disclosed separately ( highlighted)

exception of the full disclosure concept

Note :

  • Materiality (both quantitative/qualitative point of view)

  • Insignificant/Small items may be ignored.


Full disclosure concept

Full Disclosure Concept

every aspect of the accounting should be shown/disclosed

Nothing should be hidden

Determines the characteristic of “Completeness”

Informations are disclosed in “Notes to accounts”


Revenue recognition concept

Revenue Recognition concept

Also called as “Realization concept”

Transaction to be recognized when “realized”


Accounting policies

Accounting policies

Specific accounting principles and methods of applying these principles

Policies vary from concern to concern

areas where different Accounting policies can be used:

  • Methods of depreciation

  • Valuation of inventories

  • Valuation of investments

  • Etc.


Selection of accounting policies

Selection of Accounting policies

Basis of selection of Accounting policies

PrudenceMateriality

Substance over form

Note : The characteristics of True & fair view & Accrual is also considered


Accounting policies1

Accounting policies

Accounting policies should be consistently applied

Policy can be changed :

  • Change is required as per statute/legislature

  • Change is for compliance of Accounting Standard

  • For more better/appropriate presentation of financial statement


Accounting estimates

Accounting estimates

  • The judgments/reasonable estimates needed.

  • Provisions (an accounting estimate)

  • Change in accounting estimate

    difference arises between certain parameters estimated earlier and re-estimated during the current period or actual result achieved during the current period.


Accounting principles

MCQs

Q.1. RPC Ltd. follows the written down value method of depreciating machinery year after year by applying the principle of


Accounting principles

MCQs

Q.2. “Business unit is separate & distinct from the persons who supply capital to it”, is based on


Accounting principles

MCQs

Q.3.All of the following are valuation principles except:


Accounting principles

MCQs

Q.4. A businessman purchased goods for ` 25,00,000 and sold 80% of such goods during the accounting year ended 31st March, 2011. The market value of the remaining goods was ` 4,00,000. He valued the closing Inventory at cost. He violated the concept of


Accounting principles

MCQs

Q.5. Writing of transaction in the ledger is called :


Accounting principles

MCQs

Q.6. The Cost of a Calculator has been treated as an expense due to which concept?


Accounting principles

MCQs

Q.7. In double entry book keeping system, every transaction affects at least ______account(s).


Accounting principles

MCQs

Q.8. According to which concept, the owner of an enterprise pays the ‘interest on drawings’?


Accounting principles

MCQS

Q.9. Fundamental Accounting Assumptions are:


Accounting principles

MCQs

Q.10. Double entry Principle means:


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