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Accounting Principles

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

  2. 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)

  3. Fundamental Accounting Assumptions

  4. Consistency • Meaning : Accounting policy chosen should be consistently applied • Example: ABC Ltd. uses WDV method of Depreciation, year after year. • Objective: Comparability, Understandability

  5. 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.

  6. 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

  7. 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.

  8. Fundamental Accounting Assumptions As per Accounting Standard 1 “ Disclosure of Accounting Policies” Accounting Assumptions are not to disclosed (if followed)

  9. Accounting Concepts Business Entity Money MeasurementDual Aspect Historical CostConservatism MatchingPeriodicity MaterialityFull Disclosure Revenue Recognition

  10. 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

  11. Historical Cost Conept Asset/Liability – recorded at ORIGINAL COST Market Value/Time value of money- not considered. Original Cost= Purchase Cost + Capital Expenditure

  12. 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

  13. 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.

  14. Valuation Principles Historical CostRealizable value Current/Replacement Cost Present Value (as per time value of money) Note : Future Value is ignored

  15. 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

  16. Matching Concept The periodical revenues earned & expenses incurred should be matched. Helps in compiling P & L A/c

  17. 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”

  18. 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

  19. 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.

  20. 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”

  21. Revenue Recognition concept Also called as “Realization concept” Transaction to be recognized when “realized”

  22. 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.

  23. 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

  24. 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

  25. 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.

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

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

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

  29. 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

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

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

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

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

  34. MCQS Q.9. Fundamental Accounting Assumptions are:

  35. MCQs Q.10. Double entry Principle means:

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