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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Generally Accepted Accounting Principles
The Backbone of Accounting Information system,
( Accounting Principles are the doctrines behind the application of accounting concepts/practices)
Accrual basisCash Basis
transaction accrued (Cash/Credit) receipt/payment of Cash
Revenue transactions (P & L A/c)
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.
As per Accounting Standard 1
“ Disclosure of Accounting Policies”
Accounting Assumptions are not to disclosed (if followed)
Business Entity Money MeasurementDual Aspect
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
Asset/Liability – recorded at ORIGINAL COST
Market Value/Time value of money- not considered.
Original Cost= Purchase Cost + Capital Expenditure
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
A scale/standard of measurement
1. No universal denomination.
2. Not stable in the dimension
3. Not an exact measurement discipline
Historical CostRealizable value
(as per time value of money)
Note : Future Value is ignored
Concept of definite accounting period
An accounting period is to be selected (as business life is indefinite)
Helps in :
The periodical revenues earned & expenses incurred should be matched.
Helps in compiling P & L A/c
(Debit & Credit)
or affect at least two accounts.
(Based on Balance Sheet)
“Capital + Liabilities = Assets”
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
Items having significant effects
(relevant for decision makers)
Should be disclosed separately ( highlighted)
exception of the 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”
Also called as “Realization concept”
Transaction to be recognized when “realized”
Specific accounting principles and methods of applying these principles
Policies vary from concern to concern
areas where different Accounting policies can be used:
Basis of selection of Accounting policies
Substance over form
Note : The characteristics of True & fair view & Accrual is also considered
Accounting policies should be consistently applied
Policy can be changed :
difference arises between certain parameters estimated earlier and re-estimated during the current period or actual result achieved during the current period.
Q.1. RPC Ltd. follows the written down value method of depreciating machinery year after year by applying the principle of
Q.2. “Business unit is separate & distinct from the persons who supply capital to it”, is based on
Q.3.All of the following are valuation principles except:
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
Q.5. Writing of transaction in the ledger is called :
Q.6. The Cost of a Calculator has been treated as an expense due to which concept?
Q.7. In double entry book keeping system, every transaction affects at least ______account(s).
Q.8. According to which concept, the owner of an enterprise pays the ‘interest on drawings’?
Q.9. Fundamental Accounting Assumptions are:
Q.10. Double entry Principle means: