They should be informational for the users. These conventions are derived by usage and practice. The accountancy bodies of the world may change any of the convention to improve the quality of accounting information. Accounting conventions need not have universal application. The following are the widely accepted accounting concepts: a Entity concept: Entity concept states that business enterprise is a separate identity apart from its owner.
Accountants should treat a business as distinct from its owner. This basic concept is applied to all the organizations whether sole proprietorship or partnership or corporate entities. Entity concept means that the enterprise is liable to the owner for capital investment made by the owner.
Example: Mr. Now if Mr. Since money is the medium of exchange and the standard of economic value, this concept requires that those transactions alone that are capable of being measured in terms of money be only to be recorded in the books of accounts.
Transactions and events that cannot be expressed in terms of money are not recorded in the business books. For example; employees of the organization are, no doubt, the assets of the organizations but their measurement in monetary terms is not possible therefore, not included in the books of account of the organization. Measuring unit for money is taken as the currency of the ruling country i.
The monetary unit though an inelastic yardstick, remains indispensable tool of accounting. It may be mentioned that when transactions occur across the boundary of a country, one may see many currencies.
What is his total sales? These are not amenable to even arithmetic treatment. So transactions are to be recorded at uniform monetary unit i. Also, many material transactions and events are not recorded in the books of accounts just because theycannot be measured in monetary terms.
Therefore it is recognized by all the accountants that this concept has its own limitations and inadequacies. Yet it is used for accounting purposes because it is not possible to adopt a better measurement scale. Entity and money measurement are viewed as the basic concepts on which other procedural concepts hinge. For a business entity it causes inconvenience to measure performance achieved by the entity in the ordinary course of business.
However, it may also be 6 months or 9 months or 15 months. Usually this period is one calendar year. We generally follow from 1st April of a year to 31st March of the immediately following year. Thus, for performance appraisal it is not necessary to look into the revenue and expenses of an unduly long time-frame. There cannot be unpaid expenses and non- receipt of revenue. Financial statements prepared on the accrual basis inform users not only of past events involving the payment and receipt of cash but also of obligations to pay cash in the future and of resources that represent cash to be received in the future.
To understand accrual assumption knowledge of revenues and expenses is required. For example, 1 Mr. X started a cloth merchandising. It arose in the ordinary course of cloth business; Mr. This is also revenue which arose from rendering services. Lastly, 3 Mr. Suppose, the machine purchased by Mr. A in the third example will last for 10 years only. For the time being, ignore the idea of accounting period. Accrual means recognition of revenue and costs as they are earned or incurred and not as money is received or paid.
The accrual concept relates to measurement of income, identifying assets and liabilities. Expense i. Revenue may not be realised in cash. Cash may be received simultaneously or i before revenue is created A. Cash may be paid simultaneously or i before expense is made B. If the expenses remain unpaid in respect of goods, it is called Trade payables, if it remains unpaid for other expenses, it is called Expense payables.
This leads to adjustment of certain items like prepaid and outstanding expenses, unearned or accrued incomes. It is not necessary that every expense identify every income.
Some expenses are directly related to the revenue and some are time bound. For example:- selling expenses are directly related to sales but rent, salaries etc are recorded on accrual basis for a particular accounting period.
In other words periodicity concept has also been followed while applying matching concept. P K started cloth business. He purchased 10, pcs. Let us see how the accrual and periodicity concepts operate.
Here, it is January - December, So revenues and expenses are to be measured for the year and assets and liabilities are to be ascertained as on 31st December, Obviously the answer is No.
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