SAI KRIPA
ACCOUNTING THEORY
By:- CA Rakesh Kalra
INTRODUCTION OF ACCOUNTING AND ACCOUNTING PROCESS
1. ACCOUNTING: -
Accounting is Recording Financial Transactions, Summarising them and communicating the
financial information to users (i.e. Proprietors, Creditors, Investors, Government
agencies, researchers, Consumers, Public etc.). It is because of these characteristics that
accounting is necessary for each and every enterprise and now it becomes the Language
of Business.
“Accounting is the art of recording, classifying and summarising in a significant manner
and In terms of money; transactions and event which are, in part at least, of a financial
character, and interpreting the result thereof.”Issued by Terminology of the American
Institute of Certified Public Accountants
2. ACCOUNTING CONCEPTS
There are Ten Accounting concepts which everyone has to follow while maintaining books
of accounts of the Business. These Accounting Concepts are universally applicable, and
accepted by all accounting Institutes. These are back bone of Accountancy, they are as
follows: -
Business Entity Concept: - According to this concept business is considered separate
from its business man. All transactions are viewed and recorded in the books of accounts
from the Business point of view and not business man point of view. For Example- amount
invested by Mr X a business man in his Firm XYZ Limited will be viewed and recorded from
the XYZ Limited’s point of view and not from X’s point of view, so such amount will
become liability of the business and business has to show such liability in his Balance
Sheet.
Money Measurement Concept: - According to this Concept only those transaction are
recorded in the books of accounts which can be measures in terms on money only and
those transactions which are not measures in terms of money are not recorded in books of
accounts. This concept states that money is the common denominator in recording all
transaction. For Example- suppose business has 50,000 kg of raw material or it has 65,000
square feet of land that in books of accounts only their monetary value will be shown i.e.
they will be converted into money terms.
This concept has limitations also as it is not recorded those transactions which are not in
money terms however it effected routine work or profitability of business such as-
suppose there will be a fight between management and worker and due to this factory
remain close for 2 months, this will affect the profitability of business but it cannot be
recorded anywhere as management Fight cannot converted in term of money.
Going Concern Concept: - According to this concept it is assumed that business will
continue for an indefinite period and there is no intention to close the business or scale
down its operation significantly. For Example- Because of this concept Business will
consider for purchasing long term assets like Land, Machinery, Plant, etc. this concept
will assume that business man will run the business in future and will not have any
intention to make his production down.
Accounting Period Concept: - According to this concept the indefinite life of business is
1
, broken into smaller period generally one year to measure its performance i.e. to
calculate profit. This concept states that as per going concern concept the life of business
is indefinite, but the performance of the business will be measures in one year intervals.
Cost Concept: -This concept is for assets of the company, according to this concept all
assets are recorded it the books of the accounts at the value which are spend for its
purchase that is assets are recorded at purchase cost of it and same will be reduced for
the depreciation point of view, suppose a firm purchased Land for Rs 1500,000 and
Depreciation of land is Rs 100,000 so at the end of the year Land will be show in Balance
sheet at Rs 1400,000 (1500,000 – 100,000). This concept has one limitation also that it
will not consider market value of assets it recorded assets on historical cost only for
example- If in above example such land is purchased in year 1990 than in Balance Sheet it
will be recorded at Purchase cost reduced by depreciation however its market value on
present date is Rs 75,00,000.
Dual Aspect Concept: - According to dual aspect concept, every transaction entered into
enterprises must have two effects. These two effects must be of equal amount For
Example- Mr X invested Rs 500,000 in his business XYZ Limited, this transaction will also
recorded with effects such as Capital of the Business will increases and Assets (cash) will
also increase.
Revenue Recognition Concept: - According to these concept Revenue will be
Recognised/ considered when transaction is entered and obligation to receive payment is
arises, For Example- if goods are sold in the month of March but its payment received in
August than the Revenue is recognised in March i.e. when transaction of sale occurred
and legal obligation to receive amount is arises.
Matching Concept: -According to matching concept all the cost which is incurred to earn
the revenue should be recognised as expenses in the period when revenue is recognised.
For Example- Rs 25000 is spend to make the sale of goods whose income is recognised in
next year than such expenses will be considered to be the expense of next year and in
current year it will become prepaid expense and show in Balance sheet as Assets.
Accrual Concept: -As per this concept, a transaction is recorded at the time when it take
place and not when the settlement take place. For Example- Mr X Purchased a Car on May
2009 but its payment was made on December 2009 than in such case Car will be recorded
in balance sheet of X as Assets on May 2009 as Computer become assets of X on May 2009
with legal obligation.
Verifiable Objective Concept: - This Concept states that Accounting should be free from
all personal bias. All accounting transaction should be evidenced and supported by
business documents. For Example- Sale should be recorded only if there are Sales
invoices/ bills.
Convention of full disclosure: - According to this convention there should be complete
and understandable reporting on the financial statement of all the significant information
relating to the economic affairs of the business.
Convention of Consistency: - According to this convention, any accounting practise once
adapted and selected should be applied consistently year after year. This convention
helps in making financial statement capable of being comparable from previous year to
current year.
2
ACCOUNTING THEORY
By:- CA Rakesh Kalra
INTRODUCTION OF ACCOUNTING AND ACCOUNTING PROCESS
1. ACCOUNTING: -
Accounting is Recording Financial Transactions, Summarising them and communicating the
financial information to users (i.e. Proprietors, Creditors, Investors, Government
agencies, researchers, Consumers, Public etc.). It is because of these characteristics that
accounting is necessary for each and every enterprise and now it becomes the Language
of Business.
“Accounting is the art of recording, classifying and summarising in a significant manner
and In terms of money; transactions and event which are, in part at least, of a financial
character, and interpreting the result thereof.”Issued by Terminology of the American
Institute of Certified Public Accountants
2. ACCOUNTING CONCEPTS
There are Ten Accounting concepts which everyone has to follow while maintaining books
of accounts of the Business. These Accounting Concepts are universally applicable, and
accepted by all accounting Institutes. These are back bone of Accountancy, they are as
follows: -
Business Entity Concept: - According to this concept business is considered separate
from its business man. All transactions are viewed and recorded in the books of accounts
from the Business point of view and not business man point of view. For Example- amount
invested by Mr X a business man in his Firm XYZ Limited will be viewed and recorded from
the XYZ Limited’s point of view and not from X’s point of view, so such amount will
become liability of the business and business has to show such liability in his Balance
Sheet.
Money Measurement Concept: - According to this Concept only those transaction are
recorded in the books of accounts which can be measures in terms on money only and
those transactions which are not measures in terms of money are not recorded in books of
accounts. This concept states that money is the common denominator in recording all
transaction. For Example- suppose business has 50,000 kg of raw material or it has 65,000
square feet of land that in books of accounts only their monetary value will be shown i.e.
they will be converted into money terms.
This concept has limitations also as it is not recorded those transactions which are not in
money terms however it effected routine work or profitability of business such as-
suppose there will be a fight between management and worker and due to this factory
remain close for 2 months, this will affect the profitability of business but it cannot be
recorded anywhere as management Fight cannot converted in term of money.
Going Concern Concept: - According to this concept it is assumed that business will
continue for an indefinite period and there is no intention to close the business or scale
down its operation significantly. For Example- Because of this concept Business will
consider for purchasing long term assets like Land, Machinery, Plant, etc. this concept
will assume that business man will run the business in future and will not have any
intention to make his production down.
Accounting Period Concept: - According to this concept the indefinite life of business is
1
, broken into smaller period generally one year to measure its performance i.e. to
calculate profit. This concept states that as per going concern concept the life of business
is indefinite, but the performance of the business will be measures in one year intervals.
Cost Concept: -This concept is for assets of the company, according to this concept all
assets are recorded it the books of the accounts at the value which are spend for its
purchase that is assets are recorded at purchase cost of it and same will be reduced for
the depreciation point of view, suppose a firm purchased Land for Rs 1500,000 and
Depreciation of land is Rs 100,000 so at the end of the year Land will be show in Balance
sheet at Rs 1400,000 (1500,000 – 100,000). This concept has one limitation also that it
will not consider market value of assets it recorded assets on historical cost only for
example- If in above example such land is purchased in year 1990 than in Balance Sheet it
will be recorded at Purchase cost reduced by depreciation however its market value on
present date is Rs 75,00,000.
Dual Aspect Concept: - According to dual aspect concept, every transaction entered into
enterprises must have two effects. These two effects must be of equal amount For
Example- Mr X invested Rs 500,000 in his business XYZ Limited, this transaction will also
recorded with effects such as Capital of the Business will increases and Assets (cash) will
also increase.
Revenue Recognition Concept: - According to these concept Revenue will be
Recognised/ considered when transaction is entered and obligation to receive payment is
arises, For Example- if goods are sold in the month of March but its payment received in
August than the Revenue is recognised in March i.e. when transaction of sale occurred
and legal obligation to receive amount is arises.
Matching Concept: -According to matching concept all the cost which is incurred to earn
the revenue should be recognised as expenses in the period when revenue is recognised.
For Example- Rs 25000 is spend to make the sale of goods whose income is recognised in
next year than such expenses will be considered to be the expense of next year and in
current year it will become prepaid expense and show in Balance sheet as Assets.
Accrual Concept: -As per this concept, a transaction is recorded at the time when it take
place and not when the settlement take place. For Example- Mr X Purchased a Car on May
2009 but its payment was made on December 2009 than in such case Car will be recorded
in balance sheet of X as Assets on May 2009 as Computer become assets of X on May 2009
with legal obligation.
Verifiable Objective Concept: - This Concept states that Accounting should be free from
all personal bias. All accounting transaction should be evidenced and supported by
business documents. For Example- Sale should be recorded only if there are Sales
invoices/ bills.
Convention of full disclosure: - According to this convention there should be complete
and understandable reporting on the financial statement of all the significant information
relating to the economic affairs of the business.
Convention of Consistency: - According to this convention, any accounting practise once
adapted and selected should be applied consistently year after year. This convention
helps in making financial statement capable of being comparable from previous year to
current year.
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