| (1) Relevance | | | | the proprietor i.e. owner for his personal use are |
| The convention of relevance emphasizes the fact | | | | treated as his drawings. Such distinction between |
| that only such information should be made | | | | the owner and the business unit has helped |
| available by accounting as is relevant and useful | | | | accounting in reporting profitability more |
| for achieving its objectives. For example, business | | | | objectively and fairly. It has also led to the |
| is interested in knowing as to what has been total | | | | development of "responsibility accounting" which |
| labor cost? It is not interested in knowing how | | | | enables us to find out the profitability of even the |
| much employees spend and what they save. | | | | different sub-units of the main business. |
| (2) Objectivity | | | | (6) Stable Monetary Unit |
| The convention of objectivity emphasizes that | | | | Accounting presumes that the purchasing power |
| accounting information should be measured and | | | | of monetary unit, say Rupee, remains the same |
| expressed by the standards which are commonly | | | | throughout. For example, the intrinsic worth of |
| acceptable. For example, stock of goods lying | | | | one Rupee is same and equal in the year 1,800 |
| unsold at the end of the year should be valued as | | | | and 2,000 thus ignoring the effect of rising or |
| its cost price not at a higher price even if it is | | | | falling purchasing power of monetary unit due to |
| likely to be sold at higher price in future. Reason is | | | | deflation or inflation. In spite of the fact that the |
| that no one can be sure about the price which will | | | | assumption is unreal and the practice of ignoring |
| prevail in future. | | | | changes in the value of money is now being |
| (3) Feasibility | | | | extensively questioned, still the alternatives |
| The convention of feasibility emphasizes that the | | | | suggested to incorporate the changing value of |
| time, labor and cost of analyzing accounting | | | | money in accounting statements viz., current |
| information should be compared vis-à-vis | | | | purchasing power method (CPP) and current cost |
| benefit arising out of it. For example, the cost of | | | | accounting method (CCA) are in evolutionary |
| 'oiling and greasing' the machinery is so small that | | | | stage. Therefore, for the time being we have to |
| its break-up per unit produced will be meaningless | | | | be content with the 'stable monetary unit' |
| and will amount to wastage of labor and time of | | | | concept. |
| the accounting staff. | | | | (7) Cost |
| Accounting Concepts | | | | This concept is closely related to the going |
| (1) Materiality | | | | concern concept. According to this, an asset is |
| It refers to the relative importance of an item or | | | | ordinarily recorded in the books at the price at |
| event. Those who make accounting decisions | | | | which it was acquired i.e. at its cost price. This |
| continually confront the need to make judgments | | | | 'cost' serves the basis for the accounting of this |
| regarding materiality. Is this item large enough for | | | | asset during the subsequent period. This' cost' |
| users of the information to be influenced by it? | | | | should not be confused with 'value'. |
| The essence of the materiality concept is : the | | | | It must be remembered that as the real worth |
| omission or misstatement of an item is material if, | | | | of the assets changes from time to time, it does |
| in the light of surrounding circumstances, the | | | | not mean that the value of such an assets is |
| magnitude of the item is such that it is probable | | | | wrongly recorded in the books. The book value of |
| that the judgment of a reasonable person relying | | | | the assets as recorded do not reflect their real |
| on the report would have been changed or | | | | value. They do not signify that the values noted |
| influenced by the inclusion or correction of the | | | | therein are the values for which they can be sold. |
| item. | | | | Though the assets are recorded in the books at |
| (2) Accounting period | | | | cost, in course of time, they become reduced in |
| Though accounting practice believes in continuing | | | | value on account of depreciation charges. In |
| entity concept i.e. life of the business is perpetual | | | | certain cases, only the assets like 'goodwill' when |
| but still it has to report the 'results of the activity | | | | paid for will appear in the books at cost and when |
| undertaken in specific period (normally one year). | | | | nothing is paid for, it will not appear even though |
| Thus accounting attempts to present the gains or | | | | this asset exists on name and fame created by a |
| losses earned or suffered by the business during | | | | concern. |
| the period under review. Normally, it is the | | | | Therefore, the values attached to the assets in |
| calendar year (1st January to 31st December) but | | | | the balance sheet and the net income as shown in |
| in other cases it may be financial year (1st April | | | | the Profit and Loss account cannot be said to |
| to 31st March) or any other period depending | | | | reflect the correct measurement of the financial |
| upon the convenience of the business or as per | | | | position of an undertaking, as they do not have |
| the business practices in country concerned. | | | | any relation to the market value of the assets or |
| Due to this concept it is necessary to take into | | | | their replacement values. This idea that the |
| account during the accounting period, all items of | | | | transactions should be recorded at cost rather |
| revenue and expenses accruing on the date of | | | | than at a subjective or arbitrary value is known |
| the accounting year. The problem confronting this | | | | as Cost Concept. With the passage of time, the |
| concept is that proper allocation should be made | | | | market value of fixed assets like land and buildings |
| between capital and revenue expenditure. | | | | vary greatly from their cost. |
| Otherwise the results disclosed by the financial | | | | These changes or variations in the value are |
| statements will be affected. | | | | generally ignored by the accountants and they |
| (3) Realization | | | | continue to value them in the balance sheet at |
| This concept emphasizes that profit should be | | | | historical cost. The principle of valuing the fixed |
| considered only when realized. The question is at | | | | assets at their cost and not at market value is |
| what stage profit should be deemed to have | | | | the underlying principle in cost concept. According |
| accrued? Whether at the time of receiving the | | | | to them, the current values alone will fairly |
| order or at the time of execution of the order or | | | | represent the cost to the entity. |
| at the time of receiving the cash. For answering | | | | The cost principle is based on the principle of |
| this question the accounting is in conformity with | | | | objectivity. The supporters of this method argue |
| the law (Sales of Goods Act) and recognizes the | | | | so long as the users of the financial statements |
| principle of law i.e. the revenue is earned only | | | | have confidence in the statements, there is no |
| when the goods are transferred. It means that | | | | necessity to change this method. |
| profit is deemed to have accrued when 'property | | | | (8) Conservatism |
| in goods passes to the buyer' viz. when sales are | | | | This concept emphasizes that profit should never |
| affected. | | | | be overstated or anticipated. Traditionally, |
| (4) Matching | | | | accounting follows the rule "anticipate no profit |
| Though the business is a continuous affair yet its | | | | and provide for all possible losses. For example, |
| continuity is artificially split into several accounting | | | | the closing stock is valued at cost price or market |
| years for determining its periodic results. This | | | | price, whichever is lower. The effect of the |
| profit is the measure of the economic | | | | above is that in case market price has come |
| performance of a concern and as such it | | | | down then provide for the 'anticipated loss' but if |
| increases proprietor's equity. Since profit is an | | | | the market price has gone up then ignore the |
| excess of revenue over expenditure it becomes | | | | 'anticipated profits'. |
| necessary to bring together all revenues and | | | | Critics point out that conservation to an excess |
| expenses relating to the period under review. The | | | | degree will result in the creation of secret |
| realization and accrual concepts are essentially | | | | reserve. This will be quite contrary to the doctrine |
| derived from the need of matching expenses | | | | of disclosure. However, conservatism to a |
| with revenues earned during the accounting | | | | reasonable degree may not come in for criticism. |
| period. The earnings and expenses shown in an | | | | Accounting Equation |
| income statement must both refer to the same | | | | Dual concept may be stated as "for every debit, |
| goods transferred or services rendered during the | | | | there is a credit." Every transaction should have |
| accounting period. The matching concept requires | | | | two sided effect to the extent of same amount. |
| that expenses should be matched to the | | | | This concept has resulted in Accounting Equation |
| revenues of the appropriate accounting period. So | | | | which states that at any point of time the assets |
| we must determine the revenue earned during a | | | | of any entity must be equal (in monetary terms) |
| particular accounting period and the expenses | | | | to the total of owner's equity and outsider's |
| incurred to earn these revenues. | | | | liabilities. This may be expressed in the form of |
| (5) Entity | | | | equation: |
| According to this concept, the task of measuring | | | | A-L = Pwhere |
| income and wealth is undertaken by accounting, | | | | A stands for assets of the entity; |
| for an identifiable Unit or Entity: The unit or entity | | | | L stands for liabilities (outsider's claims) of the |
| so identified is treated different and distinct from | | | | entity; and |
| its owners or contributors. In law the distinction | | | | P stands for Proprietor's claim (Capital) on the |
| between owners and the business is drawn only in | | | | entity. |
| the case of joint stock companies but in | | | | (The form of presentation of equation A-L = P is |
| accounting this distinction is made in the case of | | | | consistent with the legal interpretation of financial |
| sole proprietor and partnership firm as well. For | | | | position. Thus it emphasizes that properly speaking |
| example, goods used from the stock of the | | | | the proprietary claim is the balance after providing |
| business for business purposes are treated as a | | | | for outsider's claims against the business from the |
| business expenditure but similar goods used by | | | | total assets of the business). |