There are total 12 accounting principles and conventions

1. 2016
Accounting Principles
and Conventions
SyedAshir Riaz
B.comHon’s 7th Semester 04 Mornings
B Y : M R S O H A I L

2. Introduction
 Actually there are a number of accounting concepts and principles based on which
we prepare our accounts.
 These generally accepted accounting principles lay down accepted assumptions and
guidelines and are commonly referred to as accounting concepts.
There are types of concepts:
1- Accounting Concepts
2- Accounting Conventions
1- Accounting Concepts:
Historical Cost Concept
Entity Concept / Business entity Concept
Going Concern Concept
Money Measurement Concept
Accounting Period Concept
Dual Aspect Concept
Accrual Concept
Matching concept
2- Accounting Conventions:
Convention of Materiality
Convention of Disclosure/ Full disclosure
Convention of Conservatism
Convention of Consistency

3. 1- HistoricalCost Concept:
An asset acquired by a concern is recorded in the books of accounts at historical
cost (i.e., at the price actually paid for acquiring the asset). The market price of the
asset is ignored.
The cost of fixed assets is recorded at the date of acquisition cost
It included the invoice price of the assets, freight charges, insurance or installation
costs
2- Separate entity concept/ BusinessEntity:
The business and its owner(s) are two separate existence entity
Any private and personal incomes and expenses of the owner(s) should not be
treated as the incomes and expenses of the business
Example:
Insurance premiums for the owner’s house should be excluded from the expense of
the business.
A Car purchased by the owner for personal use is not recorded in the Books of
Account of the Business.
3- Going Concern Concept :
The business will continue in operational for an infinite period of time.
Infinite period of time refer a period of 12 months from current accounting period.
Going concern of a business is assessed from following two conditions:
 Is there management Intention to continue its operations.
 Are the prevailing circumstances are favorable.
 The status of going concern is important because if the company is a going
concern it has to follow the generally accepted accounting standards.
Examples:
A merchandising company has a current ratio below 0.5. A creditor $1,000,000
demanded payment which the company could not make. The creditor requested the

4. court to liquidate the business and recover his debts and the court grants the order.
The company is no longer a going concern.
4- MoneyMeasurementConcept:
In accounting, a record is made only of those transactions or events which can be
measured and expressed in terms of money.
Non monetary transactions are not recorded in accounting.
Examples:
A company does not report the value of the company president in its financial
records because that value, attitude and expression cannot be expressed easily in
dollars.
5- Accounting PeriodConcept:
The period at the end of which the financial statement of a business are prepared
The accounting period of company should consist of 12 months.
The life of business is indefinite and divided into different periods. This concept is
simply intended for a periodical ascertainment and reporting the true and fair
financial position of the concern as a whole.
The life of an enterprise is broken in to smaller period so that its performance is
measured at regular intervals. According to the companies act and banking
regulation Act, accounting period should consist of twelve months. Accounting
period facilitates the business in assessing its worth after a year.
6- Dual AspectConcept :
Every business transaction has double effect. There are two sides of every
transaction. This is evident when we study the accounting term i.e., assets, capital
and liabilities.

5. Examples:
 Asset = Capital +Liabilities
 AssetsRs.6, OO,OOO=Capital+LiabilitiesRs.l,OO,OOO +Rs.5, 00,000
7- AccrualConcept:
A transaction is recorded in the book of accounts at the time when it is entered
information and not when the settlement takes place. Thus, revenue is recognised
when it is realised, i.e., when sale is complete or services are rendered; it is
immaterial whether cash is received or not.
8- Matchingconcept:
It is important to match ‘revenues’ of period with the ‘expenses’ of that period to
determine correct profit (or loss) for the accounting period.
Example:
Salary paid in 2012-13 relating to 2011-12. Such salary is treated as Expenditure
for 2011-12 under Outstanding Salaries Account, not for the year 2012-13.
9- Convention of Materiality:
Only those transactions, important facts and items are shown which are useful and
material for the business. The firm need not record immaterial and insignificant
items.
It’s totally depends on the nature and size of business.
Examples:
The remuneration paid to the executives and the directors is material.
The accounting policies are material because they help the users understand the
figures.

6. 10- Convention of Disclosure/Full disclosure:
Full disclosure principle is relevant to materiality concept. It requires that all material
information has to be disclosed in the financial statements either on the face or in
the notes to the accounts
Examples:
Accounting policies need to be disclosed because they help understand the basis of
accounting.
Details of contingent liabilities, contingent assets, legal proceedings, etc. are also
relevant to the decision making of users and hence need to be disclosed.
Details of property, plant and equipment cannot be presented on the face of balance
sheet, but a detailed schedule outlining movement in cost and accumulated
depreciation should be presented in the notes.
Tax rate is expected to change in near future. This information needs to be
disclosed.
Events after the balance sheet date) need to be disclosed.
11-Convention of Conservatism:
Anticipate/estimate No Profits but Provide for all Losses/
Examples:
Making Provision for Bad and Doubtful Debts
Showing Depreciation on Fixed Assets, but not appreciation
12-Convention of Consistency:
The accounting practices and methods should remain consistent from one
accounting period to another.

7. Whatever accounting practice is followed by the business enterprise should be
followed on a consistent basis from year to year.
The Convention of Consistency implies that accounting policies, procedures and
methods should remain unchanged for preparation of financial statements from one
period to another
Examples:
Method of Depreciation followed
Year
Method of
Depreciation
followed
2009-10
• Straight
Line
Method
2010-11
• Written
Down
Value
Method
2011-12
• Units of
Measure
Method