Usually, the GAAPs are prepared by professional bodies some of even whom are not free from unscrupulous activities and act with the management in order to avoid the various provisions of GAAP which are formulated. Comparison of accounting period with that in the past is possible only when the convention of consistency is adhered to.
It is therefore essential for the understanding that the interpretation and meaningful analysis of financial statement that these basic concepts, assumptions, principles and conventions used in the preparation must be constantly borne in mind.
There will be problem of having useful information for making economic decision. GAAPs do not consider the non-financial factors while setting-up principles or standards although they have direct bearing for setting-up such principles or standards.
Does accounting concepts and conventions allow for consistency in the preparation of financial report? Conventions in accounting have been evolved and developed to bring about uniformity in the maintenance of accounts. But it is expected that the company follows a particular method of depreciation consistently.
According to this convention, the accounting practices should remain unchanged from one period to another. According to this concept every financial transaction involves a two-fold aspect a yielding of benefits 2 the giving of benefits.
It only means that cost will be the basis for further accounting treatment. This concept is very much relevant in the case of sole proprietorship entities and partnerships. The money measurement concept implies that accounting could measure and report only those transactions and events which could be measured in terms of money.
For example, a company may adopt straight line method, written down value method, or any other method of providing depreciation on fixed assets. On the basis of this principle depreciation is charged on fixed assets on the basis of expected life rather than its market value and intangible assets are amortized over a period of time.
Since it is not a mandatory one for the Indian companies to follow the accounting standards and no penalty is imposed for non-compliance with the same, in the absence of legal provisions, Indian companies try to escape from this issue. This is the policy of playing sale game. As a source for ideas for your own research if properly referenced 3.
This could be profit maximization as in the case of the private sector or efficient and timely provision of essential services at a reduced price, as in the case of the public sector. However, there are certain exceptions to the concept: Insights Learn about the balance of payments, and how it helps countries to track how much money is coming in and how much money is going out.
Showing a position better than what it is, is not permitted. Following are the important accounting conventions in use: Therefore, full disclosure is a very healthy convention, and is important.
The information incorporated in financial statements should be reliable. In the case of a company it is recognised as a separate entity by statutes as well as from the accounting point of view. The accounting principles which are formulated in GAAP are the product of collective knowledge and experience of experts in the professional line.
Comparable information will reveal relatively strong and weak point. Accounting principle can be classified into two categories Accounting concepts Accounting convention Accounting Concepts They have generally accepted the set of accounting rules based on which transaction are recorded and financial statement are prepared.
That is, personal knowledge and judgment are not improved.
Otherwise every time the annual financial statements are prepared the probable losses on account of the possible sale of assets should be accounted.
Their non-disclosure would affect the ability of the users for evaluations and decisions. Accounts should lend themselves easily to comparisons and contrasts.
Some of the important concept are given as follows: According to this concept profit should be accounted for only when it is actually realized.concepts, objectives, policies, postulates, principles and procedures. It is quite easy to have an argument about each of these descriptions.
For example, if you are told that ‘this. Postulates, Principles, and Concepts Learning Objectives After reading this chapter, you should be able to: • Understand the significance of Accounting Research Studies Nos. 1 and 3 and why they failed. • Be familiar with the basic concepts of postulates and principles that underlie historical costing.
This convention plays its role particularly when alternative accounting practice is equally acceptable. Moreover, consistency serves to eliminate personal bias. But if a change becomes desirable, the change and its effect should be clearly stated in the financial statements.
Rules of accounting that should be followed in preparation of all accounts and financial statements.
The four fundamental concepts are (1) Accruals concept: revenue and expenses are recorded when they occur and not when the cash is received or paid out; (2) Consistency concept: once an accounting method has been chosen, that method should be used unless there is a sound reason to do otherwise.
Accounting Concepts and Conventions: By Dr C R S Pillai Professor Pillai's Institute of Management Studies and Research New Panvel, Navi Mumbai Accounting is the language through which the performance and financial status of an enterprise is communicated to the outside world.
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