In this tutorial, we will learn about accounting concepts, principles and conventions are as dynamic as today’s business world.
Accounting is the language of business. The financial statements prepared by the accountant communicate financial information to the various stakeholders for decision-making purposes.
Therefore, financial statements made by different firms must be prepared regularly. They should be consistent over time, changing the methods and policies frequently may affect the firm’s position and create utter confusion.
It may define recording, classifying, summarizing, and interpreting the financial transactions and communicating the results thereof to the persons interested in such information.
To avoid confusion and assure uniformity in the preparation of the financial statements accounting process is applied within the conceptual framework of ‘Generally Accepted Accounting Principles’ (GAAP). GAAP is used to describe rules developed for the preparation of financial statements and are called concepts, principles, conventions, and postulates, etc.
They provide standardization to the accounting system as accounting is the backbone of an enterprise and the economy. These concepts, accounting standards are considered as a theory base of accounting.
Accounting concepts define certain assumptions on which the accounting is done. They are necessary as they provide uniformity and internal logic to accounting. The idea means an idea or nation, which has universal application. The financial transactions which occur daily in an enterprise are done in the light of these concepts. Going concerned, the Entity concept is some of the examples of accounting concepts.
According to this concept, every transaction has two sides, at least. If one account is debited, any other consideration must be credited. Every business transaction involves the duality of effects.
- According to this concept, business and its owners are separate entities.
- The owner treats as the creditor of the company to the extent of capital contributed by him.
- All transactions of the business are recorded in the books of business from the company.
- This concept keeps the personal affairs of the owner away from business affairs.
- Income or profit is the property of the business unless distributed among the owners.
“Accounting principles are a body of doctrines commonly associated with the theory and procedures of accounting serving as an explanation of current practices and as a guide for the selection of conventions or procedures where alternatives exist.” ‘ ICAI‘
Accounting principles must satisfy the following principles:
- They should be based on real assumptions
- They must be simple, understandable, and explanatory.
- They must reflect future predictions.
- They must be informal for the other users.
Accounting conventions emerge from accounting practices, commonly known as accounting principles, which various organizations adopt over some time.
They are derived from the usage and practices. They are as dynamic as today’s business world, so to improve the quality or productivity of the business enterprises may change these conventions.
This convention describes that accounting principles and methods should remain consistent to enable the management to compare the two; these principles should not change year after year.