Accounting principles and concepts ppt

fundamental accounting principles ppt and accounting concepts and conventions ppt
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Dr.DinoHardy,United Arab Emirates,Teacher
Published Date:25-07-2017
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CPT Section A Chapter 1 Unit 2 CA. S.S.Prathap Accounting principles are a body of doctrines commonly associated with the theory and procedures of accounting. Based on real assumptions Followed consistently Accounting principles should be Reflect future predictions Informational to users Accounting Convention refer to the general agreement on the usage and practices in social or economic life. GAAP - Generally Accepted Accounting Principles  Accounting concepts are the foundation of modern Accounting.  Accounting is based on the following concepts . All transactions must be translated in terms of money. If any transactions cannot be translated in terms of money , then it cannot come in accounts. Example : Loyalty of workers Skill of management Accounts Every debit has a credit & every credit has a debit • double entry book keeping followed • Fundamental accounting equationEquity + Liabilities = Assetsis based on dual aspect. It is a time line starting from 1st April to 31st March All material things which happened within these 12 months and can be measured in terms of money must be accounted Eg. Charging of annual depreciation to P & L a/c is a clear example of periodicity concept Proprietor is independent/ different from the business. So profits earned during the year are shown as a liability in the books of accounts. Owner is treated as a creditor of the business, so it is the liability of the business to return the money to the owner Purpose: To eliminate personal transactions from business transactions  Capital is shown as a liability in the Balance Sheet All future anticipated losses have to be taken into accounts BUT no future gains can be taken into accounts without realizing it. This concept is applied especially to closing stock. Due to conservatism concept, closing stock is valued at COST or MARKET PRICE whichever is lower. Provision for bad debts is made to conservatism concept. Profits for the year are understated due to prudence concept. All expenses which went towards generating sales have to be debited in the books of accounts Any expense which was incurred but which didn't go towards generating sales cannot be debited Example : Drawings A/c Closing Stock All assets must appear in the balance sheet at the price for which it was acquired Profits can only be booked when sale has taken place . Merely because the value of closing stock has gone up , it doesn’t mean profits have been made. you cannot book / record profits before you sell the goods. Only after you sell it, you book profits. Eg. Gold bought as Rs 1 lac. Value of gold increased to Rs 100 lacs. In the Balance Sheet, must show the value of gold at cost and not Rs 100 lacs. After you sell the gold for Rs 100 lacs, then only you can book profits. All important items have to be mentioned in account. In the absence of materiality, wrong decisions can be taken. Eg. Paise can be omitted in accounts. All expenses directly connected to a CAPITAL ASSET till it is installed becomes part of the cost of the asset. Pre-operating cost, Pilot Test runs (Trial runs) and Major overhauling expenses becomes part of the cost of the asset. Major overhauling: Buy old machine  Repair  Renovate it Acquisition Cost (Cost of purchase) = Cost of old machine + Repairs + Renovation Cost Eg. Legal fees, Installation fees for machinery, Transport charges on purchase of furniture. It is financial substance over legal form . Flow of money Example : Purchase of Land , Entire stock and business destroyed in fire both will have to be recorded. Fundamental Accounting Assumptions are part of AS – 1 , 1 . Going 2. 3. Accrual concern Consistency concept. concept No reason for the company to discontinue its operations in the near future (1yr). If Going concern is not there , all assets will be valued at Net Realizable Value.(Market value) The same set of rules have to be followed all the time. There are 2 types of accounting. One is cash accounting and the other is mercantile accounting. Accrual concept is based on mercantile accounting. Income and expenses are recorded in the books of accounts as and when they are due and not on receipt basis. If an enterprise has enjoyed the facility but has not yet paid for it, that amount should be recorded in the books of accounts. Example : Unpaid Rent In Accrual , the cash flow is de-linked from expenses incurred or income earned.

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