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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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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)


  • Meaning : Accounting policy chosen should be consistently applied

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

  • Objective: Comparability, Understandability


  • 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


  • 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


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


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


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


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.


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: