Chp-14 ~ Accounting Principles (GAAP) Flashcards
What are the features of accounting principles?
- They are uniform set of rules
- They are man-made
- They are flexible
- They are generally accepted
Which categories are to be satisfied for the acceptance of the general accounting principles?
- Relevance
- Objectivity
- Feasibility
What are the various accounting concepts or assumptions?
- Going concern concept
- Consistency concept
- Accrual concept
- Accounting entity concept
- Money measurement concept
- Accounting period concept
- Revenue recognition concept
- Verifiable objective concept
- Matching concept
- Historical cost concept
- Dual aspect concept
- Timelines
- Industry practice
- Substance over legal form
What is the going concern concept?
As per this concept, it is assumed that the business will continue to exist for a long period in the future.
It is on this concept that we record fixed assets at their original cost and depreciation is charged on these assets without reference to their market value.
It is also because of the going concern concept that outside parties enter into long-term contracts with the enterprise, give loans and purchase debentures and shares of the enterprise.
Also, without this concept, the classification of current and fixed assets and short and long term liabilities cannot be made and such classification would be difficult to justify.
What is the consistency concept?
This concept states that accounting principles and methods should remain consistent from one year to another.
But the consistency concept should not be taken to mean that it does not allow a firm to change the accounting methods according to the changes circumstances of the business.
What is the accrual concept?
In accounting, accrual basis is used for recording of transactions.
It provides more appropriate information about the performance of business enterprise as compared to cash basis.
In accrual concept, revenue is recorded when sales are made or services are rendered and it is immaterial whether cash is received or not.
What is accounting entity concept?
According to this concept, business is treated as a unit separate and distinct from its owners, creditors, mangers and other.
The owner of a business is always considered as distinct and separate from the business he owns.
What is the money measurement concept?
Only those transactions and events are recorded in accounting which are capable of being expressed in terms of money.
What is the accounting period concept?
According to the amended income tax law, a business has to compulsorily adopt a financial year beginning on 1st April and ending on 31st March in the next calendar year, as its accounting principle.
What is the revenue recognition concept?
Revenue means the amount which is added to the capital as a result of business operations.
Revenue is earned on the sale of goods or by providing service.
The concept of revenue recognition determines the time or the particular period in which the revenue is realised.
Revenue recognition is not related with the receipt of cash.
What are the exceptions to the rule of revenue recognition?
- In case of sales on instalment basis, the amount collected in instalments is treated as realised.
- In case of Lon-term construction projects, it is difficult to postpone the revenue till the completion of full contract. So, that proportionate part of the revenue which is equal to the part of contact completed by the end of the year is recognised as realised.
- In case of mining, revenue is considered in the accounting period when production is made even though a sale has not been made.
What is the verifiable object concept?
This concept requires that accounting transaction should be recorded in an objective manner, free from personal bias of either management or the accountant who prepares the accounts.
What is the matching concept?
According to this concept, in determining the net profit from business operations, all costs which are applicable to revenue of the period should be charged against that revenue.
What is the historical cost concept?
According to this concept, an asset is ordinarily recorded in the books of accounts at the price at which it was acquired.
What is the dual aspect concept?
According to this concept, every business transaction is recorded as having a dual aspect. Every transaction has at least two accounts.
Capital = Asset - Liabilities
What is the concept of timelines?
This concept requires that the financial statements (P&L A/c and Balance Sheet) should be prepared quickly a the end of the accounting period and made available to the management and other external users at the earliest possible times.
What is industry practice?
An accountant while preparing financial statements must follow the accounting practices prevailing in that industry.
What is substance over legal form?
Transactions and other events should be accounted for and presented according to their substance and financial reality and not according to their legal form.
What are accounting conventions?
An accounting convention may be defined as a custom or general accepted practice which is adopted either by general agreement or common consent among accountants.
Difference between accounting concepts and conventions.
- Legal position:
Have legal acceptance || Based on general agreement - Recording Vs. Financial Statements:
On their basis, transactions are recorded || Followed in preparing P&L A/c and Balance Sheet - Significance:
Uniform set of rules - usually followed in recording transactions || Not so important - Role of personal:
No personal judgement || Personal judgement may play a crucial role - Uniform Adoption:
Uniformly adopted in different enterprises || No uniformity in adoption in various enterprises.
What are the different accounting conventions?
- Convention of full disclosure
- Convention of Materiality
- Convention of Conservatism (Prudence)
