Accounting Concepts and Conventions

Back to: FINANCIAL ACCOUNTING SS2

 

Welcome to class! 

In today’s class, we will be talking about accounting concepts and conventions. Enjoy the class!

Accounting Concepts and Conventions

CONTENT

• Definition of Concepts and Conventions
• Accounting Concepts
• Accounting Convention

ACCOUNTING CONCEPTS AND CONVENTIONS

Accounting concepts and convention are a set of rules or principles that are taken into consideration in the preparation of financial statements. The financial statements include Trading, profit and loss account as well as the balance sheet. For uniformity of purpose, generally accepted rules or principles in the form of assumption for its preparation and presentation are adopted, and these are called accounting concepts and conventions.

ACCOUNTING CONCEPTS

• BUSINESS ENTITY CONCEPT: The rule here is that the owner and the business are treated separately. Therefore in the preparation of the financial statement, the business is recognized as a separate and distinct entity, only things that affect the business are recorded and not the wealth of the owner(s) apart from those invested.
• GOING CONCERN CONCEPT: Going concern means continuity and not liquidation. That is no reason or fear of discontinuity exists.
• MONEY MEASUREMENT CONCEPT: This concept states that financial statements must reflect only transaction and entries that are capable of being expressed in monetary terms.
• COST CONCEPT: In the preparation of financial statements. Assets are valued at cost. It is on cost and not market value because the business is not for sale.
• ACCRUAL CONCEPT: This concept states that expenses and revenue are recognized and reported in the profit and loss account as they are incurred and earned respect and not as they are paid or received.
• MATCHING CONCEPT: This concept explains that all expenses must be matched and reported against revenue generated at that period to determine the net profit. NB: This is the same as the accrual concept
• DUAL ASPECT CONCEPT: This explains the principle of double-entry.
• REALIZATION CONCEPT: This concept explains that income is recognized as soon as goods are exchanged for valuable consideration.

EVALUATION

1. Explain the term “Accounting Concepts”.
2. Explain the following accounting concepts: (a) going concern (b) money measurement            (c) accrual

ACCOUNTING CONVENTIONS

• MATERIALITY CONVENTION: This convention states that amount of materials significant n value must be recorded in the preparation of the financial statement. This explains why certain economic events are not reported when the amount of their value is insignificant as to affect the financial statement e.g. depreciation of calculator, wall clock etc.
• CONVENTION OF CONSERVATISM: The convention of conservatism states that the principles of treating income and losses as well as the valuation of assets.
  1. Income should not be anticipated
  2. All possible losses must be provided for
  3. When more than one method of valuing an asset is evolved, choose the method with less value (i.e. lower of cost) and or market value.
• CONSISTENCY CONVENTION: This states that there should be consistency in the treatment of similar transactions. This implies that similar transaction within the same period and between one period and another must be treated alike, any changes of a method may distort the profit calculation.

GENERAL EVALUATION 

1. List five items expenses related to a departmental account and a base of apportioning each item
2. State eight uses of the General Journal
3. Explain the principle of the double-entry system
4. Explain the following errors giving an example of each (a) principle (b) compensation (c) omission
5. What is a bank reconciliation statement?

 

In our next class, we will be talking about Introduction to Accounting Ratios.  We hope you enjoyed the class.

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