Accounting Concepts
It refers to necessary assumptions and ideas which are fundamental to accounting practice. The following principles of accounting can be summarised as accounting concepts:
(i) Separate legal entity concept
This concept assumes that a business has a distinct and separate entity from its owners and is treated as two separate entities. All transactions in the books of accounts are recorded from the point of business and not from that of the owner(s). It is also known as the business entity or accounting entity concept.
(ii) Money measurement concept
As per this concept, only those transactions which are in the form of money or are convertible in terms of money can be recorded in the books of accounts and all such transactions which cannot be measured in terms of money do not find any place in the books of accounts, though they may be highly useful for the business.
(iii) Cost/Historical cost concept
According to this concept, all assets are recorded in the books of accounts at their purchase price paid to acquire it and the same price becomes the base for further accounting treatment.
(iv) Dual aspect concept
This concept holds that every transaction has a dual or two-fold effect and should, therefore, be recorded at two places with equal amounts of debit and credit. As a result of this dual aspect concept, total assets must be equal to total equities or claims. It is from this relationship that the term ‘balance sheet’ has been derived.
(v) Accounting period concept
Accounting period refers to the span of time at the end of which the financial statements of an enterprise are prepared to know whether it has earned profit or incurred loss during such period and what exactly is the position of its assets and liabilities at the end of that period. Such period is usually of one year and is known as accounting year which normally starts on 1st April of one year and ends on 31st March of next year.
(vi) Matching concept / Periodic matching of costs and revenue concept
This concept implies that all revenues earned during an accounting year, whether received during that year or not and all costs incurred, whether paid during the year or not should be taken into account while ascertaining profit or loss for such year.
(vii) Revenue recognition (realisation) concept
Realisation means as to when a transaction gives legal right to the receipt of money. Revenue is considered to have been realised when a transaction has been entered into and the obligation to receive the amount has been established.
(viii) Verifiable objective concept / Objectivity concept
According to this concept, all financial transactions which are recorded in the books of accounts must be supported by vouchers, prepared on the basis of source documents.
Accounting Conventions
It refers to customs, traditions, methods and procedures which act as a guide to the preparation of financial statements based on general agreement between the accounting bodies.
Following are the accounting conventions:
(i) Conservatism (prudence) convention
This convention advocates to anticipate no gains but to provide for all possible losses while preparing financial statements of an organization.
The convention requires that profits should not to be recorded until realised but all losses even those which may have remote possibility are to be provided for in the books of accounts.
(ii) Full disclosure convention
This convention requires that all material and relevant facts concerning the financial performance of an enterprise must be fully and completely disclosed in the financial statements with their accompanying footnotes to enable the stakeholders to make correct assessment about the profitability and financial soundness of the enterprise.
(iii) Materiality convention
This convention insists to disclose only important and relevant information while preparing financial statements of an enterprise.
An item as a part of financial statements should be considered as material (significant), if the knowledge of that item could affect the decisions of the users of the financial statements such as to invest or not to invest in a particular firm.
(iv) Accounting practices convention
Sometimes, due to the unique features of an industry, the business organisations may not follow the accounting principles, guidelines, methods and techniques fully or partly as prescribed.
Difference between concepts and conventions
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