Friday, 1 February 2013

4 Financial Accounting.Principles- Concepts and conventions of Accounting, Meaning, Definition and objectives of Accounting.

Accounting- Meaning and Definition

Accounting is a process of communicating the results of business operations to various parties who are interested or connected with the business, which includes the owners, investors, creditors, government, bank and other financial institutions etc. Accounting is associated with everybody who is interested to keep the accounts of finance or monetary transactions.

The American Institute of Certified Public Accountants has defined accounting as ''the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are in part at least, of financial character, and interpreting the results thereof".  The above mentioned definition shows the following aspects of accounting.

  • Accounting involves both art and science.
  • This includes recording, classifying and summarizing of business transactions.
  • This records the transactions in terms of money.
  • It records the financial things and events only.
  • Accounting is the process of interpreting the results of financial operations.
  • This communicates the results of analysis and interpretation to the management or to the concerned party.
Main Objectives of Accounting

The main objectives of accounting is as follows:-
  • To evaluate the operating results of the enterprise.
  • To disclose the financial position of the business
  • To ensure necessary control over the operation as well as the resources of the business.

Accounting Principles
Accounting principles are the norms or rule of actions adopted while recording business transactions which will ensure the uniformity, clarity and understanding of business. The accounting principles are mainly classified in to two categories. They are Accounting Concepts and Accounting Conventions. 

1. Accounting Concepts
        Accounting concepts are basic assumptions or conditions which the accounting system is based. The important accounting concepts are Business Entity Concept, Going Concern concept, Dual Aspect Concept, Cost Concept, Money measurement Concept, Realization Concept, Accrual Concept and matching Concept.

  • Business Entity Concept-  Business entity concept states that the business and business man are two separate entity. Under this, business is treated as a separate unit distinct from its owner. The transactions between the proprietor and the business will be recorded separately in the books of business and shown separately under the heading 'Capital account'.
  • Going Concern concept- As per this concept business unit has a perpetual succession or a continued existence and the transactions are are recorded from the point of view. The concept says  that the business will continue in operation long enough to charge the cost of fixed assets over the useful life time against the income from business.
  •  Dual Aspect Concept- Under this concept each business transaction has two aspects they are receiving aspects and giving aspects. The receiving aspect is known as Debit aspect and the giving aspect is known as the Credit aspect of the business.
  • Cost Concept- Cost Concept is based on the Going concern concept. According to this concept, assets purchased will be entered in the business book as per the cost price in which they are purchased and this will be the base for further accounting of assets.
  • Money measurement Concept- This concepts states that, the transactions which will treat only in the terms of money.
  • Realization concept- According to this Revenue is recognized only when the sale is made.
  • Matching Concept- This matches the cost along with the revenue.
2. Accounting Conventions
        This is method or custom in which the accountants are following for the preparation of accounting statements. This includes mainly three types of conventions. They are as follows:-
  • Convention of conservatism
  • Convention of consistency
  • Convention of material Disclosure.
These all are the accounting concepts and conventions.


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