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Accounting Concepts and Conventions
Financial accounting has been called by many eminent persons in the field, as a set of tenets
associated with well established procedures of accounting; it is a guide, which directs the persons
or places for choosing of procedures or conventions
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To convey a uniform meaning to all persons or places concerned, the professional accountants
follow a set of well established concepts, which are important for Financial Accounting
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Under this concept owners entrust resources to the management, while the management is
expected to utilize these resources to optimum and best advantage of the organization, and also to
estimate and account for the resources, and other things given at its disposal
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Going Concern Concept:

The tenet of this concept is that the organization will continue for an indefinitely long period
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But in the case of a going concern, current value of assets is not relevant
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In our organization, which is one of the largest PSU will have multi-various activities with 20000
employees
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Cost Concept:

The main aspect of this concept is that in the books of accounts, transactions are recorded with
the amount actually involved
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This price is the medium for all subsequent accounting of the assets
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Also the cost of an asset that has a long but limited life is systematically reduced during its life by
‘depreciation’ (written off)
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Hence to safeguard the welfare of the organization, the cost concept plays a vital role
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An

organization or enterprise dealing with multiplicity of units, expressing them in physical or
quantitative terms becomes difficult and meaningless
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Regardless of the fluctuations in the level of prices, the monetary convention assumes that money
unit is stable
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At the end of the period the financial statements namely balance sheets profit and loss accounts
are prepared
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At the end of this period (calendar
year, financial year) the Accountant reports all the financial activities taken place during that
period
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For internal reporting, once in 3 months period is adopted
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Duality or Dual Aspect Concept:

-The assets are owned by the business enterprise, the claims made by various parties against these
assets are called ‘equities’
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Accrual Concept:

This concept discriminates and guides how the cash received and the rights related to it are to be
treated
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The accrual concept identifies the latter and the former one, as recognized revenue and
unrecognized revenue respectively
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Similar treatment will be given to expenses incurred by the organization
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Only those amounts, which are due and payable, would be treated as expenses
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Hence it is not treated as an
expense
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On the other hand person if a person does not receive the cash, but an expense has been incurred
during the accounting period, then that person is termed as creditor
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Till the contract agreement is over
the payment will not be made, so as to satisfy all the conditions
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Objectivity:

The principles enshrined in the financial accounting is that accounting to be made only for those
transactions or events, which has support of documentary evidence, such as invoices and cash
memos
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Consistency:

This

aspect explains about the consistency of maintaining accounts
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If it undergoes some change, then the whole system will have to be changed
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The transactions like trade discount; depreciation etc should be entered in a methodical way with
consistency
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Any change should be clearly stated in the financial statements in the year of change
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This will not be tolerated by Government as well as the public
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Several decisions and conclusions are arrived at by comparing the data of one financial year
accounts with the previous year
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Accounting system in an organization

meticulously follows this foot step in preparing financial accounts
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Profit is not recognized to have been earned

till it is realized in cash or the debtor has become legally bound to pay the amount
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If it is certain, that loss will arise on the goods already produced or purchased, the possibility of
such a loss should be recorded
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In our plant, sophisticated equipments were obtained from abroad
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But the expenses and additional commitments towards the procurement, installation, maintenance,
etc were highlighted in our Accounts statement
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Matching Concept:

The

transactions of the enterprise are measured in relation to certain accounting period for

determining its periodic results (for ascertaining profits or loss, it is an index of performance of a
particular organization)
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Concept of Conservatism:

With utmost care this concept should be implemented by Accountants as that concept insists on
recording the lowest possible value for assets and highest possible values for liabilities and
expenses
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All known liabilities, losses and expenses are to be taken into account, even if there is a hint for
its existence
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A contingency is a term used to specify an event, which may result in profit or loss and cannot be
predicted accurately
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Hence net assets are always understated to avoid tax commitments and huge profit figures
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These inventories are fixed
at market price or cost price, whichever is lower
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Anticipating loss due to adverse climate, probability of loss of power generation is taken into
account
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But it will reveal only the price at which it was purchased and not the current market
price, as it will shoot up the assets value
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Funds flow statement and conventional financial statements of profit and loss account and balance
sheet
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Balance Sheet:

-Reports the financial position of an entity at a particular point in time
-Lists the things owned by the entity and also claim against them
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From the above definitions we see that a Balance Sheet only indicates the assets, liabilities and
owners equity at a particular time, but not anything about the details of the operation
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-Are the above details sufficient?
No!
We require more from the financial statements submitted by Accountant, for efficient decision
making and planning
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Other advantages of Fund flow statements
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But we
should know where enhanced capital has been utilized and where from it was obtained
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So, all information to know the flow of funds (increase or decrease) can be obtained from Fund Flow statement and not from Balance Sheet or Profit and Loss Account
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-Sales of goods bring in funds
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We can
earmark the goods, which are not up to the mark regarding sales and the products, which fetches
good turnover and profit through financial statement insisting on fund flow
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So, fund flow statement gives a helping hand to the administrator to know where from the fund
can be tapped within the organization

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