Meaning of Accounting Concepts SS1 Principles of Accounting

ACCOUNTING CONCEPTS AND CONVENTIONS

CONTENT

Meaning of Accounting Concepts

Major Accounting Concepts

Accounting Conventions

Meaning of Accounting Concepts

Accounting concepts which is also referred to as principles and fundamental accounting postulates, are rules adopted as guides to actions in preparation of accounting statements.

Major Accounting Concepts

The following are the major accounting concepts

1. Entity concept

This concept draws a distinction between the business and the owner. This concept states that the business is a personality of its own, which can sue and be sued in its own name and not in the name of the owner.

1. Going concern

This is an assumption that an organization will exist forever (at least in the force able future) except otherwise proved. This concept is the authority behind the recording of assets in the books where values of properties are extended into the future especially as concerning their benefits.[mediator_tech]

1. Money concept

This states that all financial transactions must be expressed with the currency in use in that location. The currency used in recording the financial data can be translated into other currency using the convertible nature of money.

This concept believes strongly that only financially oriented transaction should be given effect.

1. Historical cost concept

This states that the cost values of financial transaction should be used in recording such a transaction instead of fair current market values e.g. where Olu purchased a “Honda Car” latest series for N2million in Lagos while his friend Musa bought the same brand of Honda Car at the sum of N1.5million in Togo. It is expected that Olu should record his vehicle based on N2million and not otherwise while Musa do as N1.5 million and not otherwise.

1. Matching concept (Revenue vs. Expenses)

This is otherwise known as accrual concept which states that the income of a period should agree with the expenditure of the same period. Consequently, the relevant cost incurred in fetching a particular income should be matched together in arriving at the actual profit or loss of the concern.

1. Periodicity concept

This is also known as time interval concept which states that financial records and statements should be prepared for a period of twelve calendar months as agreed to by the users of financial statements and the accounting world in general.

This concept is the follow–up of the going concern concept which states that a concern or entity will exist forever except otherwise proved. The life of a concern therefore emanates from commencement to cessation. Consequently, a company cannot wait until cessation to prepare its record and statements. The user of financial statement deems it fit to prepare statements after twelve calendar months.

1. Double entry concept (Dual aspect concept)

This states that in any transaction. i.e. a financial event, there must be a debit and a corresponding credit entry. The total debit side must be equal or agree with the credit side which is the reason behind the agreement of the balance sheet.

1. Realization concept

This states that the income and expenditure of a concern must be objectively determined i.e. income earned by an organization should be based on the services rendered, received and receivables in line with the reality of the transaction. For instance, the income received from a contract award should be used on the cost of work incurred.

Accounting Conventions

Meaning of Accounting Conventions

Accounting convention is used in resolving conflicts arising out of the application of the concepts. Accounting convention therefore provide the way out, or better still, in resolving all identifiable conflicts and puzzles emanating from the application of concepts. The accounting conventions are as follows:

Major Accounting Conventions

1. Consistency

This convention simply states that accountants and financial practitioners’ are free to choose from alternative policies and such a policy so taken must be strictly followed without deviations. This, by implication, portrays accountants as reliable, dependable, trustworthy and forthright in their professions. The job of an accountant demands transparency as a basis of building trust.[mediator_tech]

1. Prudency

This convention is also known as conservatism which states that accountants and book keepers should not anticipate future profit but future loss. This convention portrays the accountant as a person that is pessimistic and not optimistic.

1. Materiality

The term materiality is relative. i.e. what is material to one person is immaterial to the other. The essence of materiality is to assess the significance of an item in relation to the whole and such item will be treated based on its size or monetary significance.

Example: An item of revenue of ₦4,000,000 in an account of a company with a turnover of ₦15million can be considered material and hence require special attention. While the same ₦4,000,000 in the account of a company with a turnover of N900million may not be considered as material.

1. Objectivity

This states that financial records should be prepared in line with verifiable evidence i.e. whatever is considered as income or expenditure should be supported with documentary evidence and facts.

EVALUATION

What is the difference between concept and convention in accounting?

Mention four accounting concepts and explain two of them.