(1) Relevance

The relevance convention emphasizes the fact that only information should be made available for accounting that is relevant and useful to achieve its objectives. For example, companies are interested in knowing what the total cost of labor has been. You are not interested in knowing how much employees spend and how much they save.

(2) Objectivity

The objectivity convention emphasizes that accounting information must be measured and expressed by standards that are commonly acceptable. For example, stocks of unsold goods at the end of the year should be valued at their cost price and not at a higher price, even if they are likely to be sold at a higher price in the future. The reason is that no one can be sure of the price that will prevail in the future.

(3) Feasibility

The feasibility convention emphasizes that the time, labor, and cost of analyzing accounting information must be weighed against the benefits derived from it. For example, the cost of “greasing and greasing” machinery is so small that its disintegration per unit produced will be meaningless and will waste labor and accounting staff time.

Accounting concepts

(1) Materiality

Refers to the relative importance of an item or event. Accounting decision makers are continually faced with the need to make materiality judgments. Is this element large enough for users of the information to be influenced by it? The essence of the concept of materiality is: the omission or misstatement of an item is material if, in light of the surrounding circumstances, the magnitude of the item is such that it is likely that the judgment of a reasonable person relying on the report would have has been modified or influenced by the inclusion or correction of the article.

(2) Accounting period

Although the accounting practice believes in the concept of continuous entity, that is, the life of the business is perpetual, it still has to report the results of the activity carried out in a specific period (usually one year). Therefore, accounting attempts to present the profit or loss earned or suffered by the business during the period under review. Normally, it is the calendar year (January 1 to December 31), but in other cases it can be the financial year (April 1 to March 31) or any other period, depending on business convenience or practices trade of the country in question. .

Due to this concept, it is necessary to take into account during the accounting period, all income and expenses increased on the date of the accounting year. The problem with this concept is that a proper allocation must be made between capital expenditures and income. Otherwise, the results disclosed by the financial statements will be affected.

(3) Realization

This concept emphasizes that earnings should be considered only when realized. The question is at what stage should profits be considered to have increased? Either at the time of receiving the order or at the time of execution of the order or at the time of receiving the cash. To answer this question, the accounting is in accordance with the law (Law of Sales of Goods) and recognizes the principle of the law, that is, the income is obtained only when the goods are transferred. It means that profits are considered to have increased when “ownership of the goods passes to the buyer”, viz. when sales take a hit.

(4) Pareo

Although the business is a continuous affair, its continuity is artificially divided into several accounting years to determine its periodic results. This profit is the measure of the economic performance of a company and, as such, increases the equity of the owner. Since profits are an excess of income over expenses, it is necessary to collect all income and expenses related to the period under review. The concepts of realization and accrual are derived fundamentally from the need to reconcile expenses with the income obtained during the accounting period. Earnings and expenses shown in an income statement must refer to the same transferred goods or services rendered during the accounting period. The matching concept requires that expenses correspond to income for the appropriate accounting period. Therefore, we must determine the income earned during a particular accounting period and the expenses incurred to obtain this income.

(5) Entity

According to this concept, the task of measuring income and wealth is carried out by accounting for an identifiable Unit or Entity: The unit or entity thus identified is treated differently and distinctly from its owners or taxpayers. In the law, the distinction between owners and company is established only in the case of joint-stock companies, but in accounting this distinction is also made in the case of sole proprietorship and joint-stock company. For example, goods used from the company’s stock for business purposes are treated as a business expense, but similar goods used by the owner, that is, the owner for his personal use, are treated as his drawings. This distinction between owner and business unit has helped accounting to report profitability more objectively and fairly. It has also led to the development of “liability accounting” that allows us to know the profitability even of the different sub-units of the main business.

(6) Stable monetary unit

Accounting assumes that the purchasing power of the monetary unit, say the rupee, remains the same at all times. For example, the intrinsic value of a rupee is equal and equal in the year 1,800 and 2,000, thus ignoring the effect of increasing or decreasing the purchasing power of the monetary unit due to deflation or inflation. Despite the fact that the assumption is unrealistic and the practice of ignoring changes in the value of money is now being widely questioned, the suggested alternatives for incorporating the changing value of money in the financial statements, that is, the method of power current purchasing power (CPP) and current cost accounting method (CCA) are in the evolution stage. Therefore, for the moment we must be content with the concept of “stable monetary unit”.

(7) cost

This concept is closely related to the concept of a going concern. Accordingly, an asset is normally recorded in the books at the price at which it was acquired, that is, at its cost price. This ‘cost’ serves as the basis for accounting for this asset during the subsequent period. This ‘cost’ should not be confused with ‘value’.

It should be remembered that since the actual value of assets changes from time to time, it does not mean that the value of such assets is incorrectly recorded on the books. The book value of registered assets does not reflect their real value. They do not mean that the values ​​indicated there are the values ​​for which they can be sold. Although assets are recorded on the books at cost, over time, their value decreases due to depreciation charges. In certain cases, only assets such as ‘goodwill’ when paid will appear on the books at cost and when nothing is paid, it will not appear even though this asset exists in the name and fame created by a company.

Therefore, it cannot be said that the values ​​attached to the assets on the balance sheet and the net income shown in the profit and loss account reflect the correct measurement of the financial position of a company, since they have no relation with the market value of the assets or their replacement values. This idea that transactions should be recorded at cost rather than subjective or arbitrary value is known as the concept of cost. Over time, the market value of fixed assets such as land and buildings varies greatly from their cost.

These changes or variations in value are generally ignored by the accountants and continue to value them on the balance sheet at historical cost. The principle of valuation of fixed assets at their cost and not at their market value is the underlying principle in the concept of cost. According to them, current values ​​alone will reasonably represent the cost to the entity.

The cost principle is based on the principle of objectivity. Supporters of this method argue that as long as users of financial statements have confidence in the financial statements, there is no need to change this method.

(8) Conservatism

This concept emphasizes that earnings should never be exaggerated or anticipated. Traditionally, accounting follows the rule “do not anticipate profits and anticipate all possible losses. For example, closing stocks are valued at cost price or market price, whichever is lower. The effect of the above is that in If the market price has fallen then anticipate the “anticipated loss”, but if the market price has risen, ignore the “anticipated gains”.

Critics point out that overconservation will result in the creation of a secret reserve. This will be quite contrary to the doctrine of disclosure. However, conservatism to a reasonable degree may not be criticized.

Accounting equation

The dual concept can be expressed as “for every debit, there is a credit”. Each transaction must have a bilateral effect to the extent of the same amount. This concept has resulted in the Accounting Equation that establishes that at any time the assets of any entity must be equal (in monetary terms) to the total stockholders’ equity and external liabilities. This can be expressed in the form of an equation:

AL = P

where

A represents the assets of the entity;

L means liabilities (external claims) of the entity; and

P represents the owner’s (capital) right over the entity.

(The form of presentation of the equation AL = P is consistent with the legal interpretation of the financial position. Therefore, it emphasizes that, properly speaking, the property right is the balance after providing the claims of third parties against the business. of total business assets).