CONCEPTS AND CONVENTIONS OF

ACOUNTANCY WITH SUITABLE EXAMPLES

The final project submitted on complete fulfillment of the course, principle of accounting and
audit during the academic session 2018-2019, Semester-2.

Submitted by

Name: Madhavi Bohra

Roll No.: 2023

Class: BBA LL.B. (H)

Submitted to

Mr. Ashok Kumar sharma

Faculty of principle of accounting and audit

March, 2019

CHANAKYA NATIONAL LAW UNIVERSITY, NYAYA NAGAR, MITHAPUR,

PATNA- 800001.

1
 ACKNOWLEDGEMENT

I would like to thank my faculty Ashok Kumar Sharma whose assignment of such
a relevant topic made me work towards knowing the subject with a greater interest
and enthusiasm and moreover he guided me throughout the project.

I owe the present accomplishment of my project to my friends, who helped me

immensely with sources of research materials throughout the project and without
whom I couldn’t have completed it in the present way.

I would also like to extend my gratitude to my parents and all those unseen hands
who helped me out at every stage of my project.

THANK YOU!
NAME-Madhavi Bohra
ROLL NO- 2023
2nd Semester (BBA.LLB)

2
 DECLARATION

I hereby declare that the work reported in this project report entitled “PRINCIPLE OF

ACCOUNTING AND AUDI WITH SUITABLE EXAMPLES” submitted at Chanakya

National Law University, Patna is an outcome of my work carried out under the supervision of

Mr. ASHOK KUMAR SHARMA I have duly acknowledged all the sources from which the

ideas and extracts have been taken. To the best of my understanding, the project is free from

any plagiarism issue.

Madhavi Bohra

DATE- 12-02-2019

3
RESEARCH METHODOLOGY:

This project would follow doctrinal methodology. Descriptive and analytical research
methodology will be followed by researcher in this project. Primary and secondary sources
have been helpful in gathering relevant information regarding project. Secondary sources like
books and articles which are available online have been used. Books suggested by faculty have
also been referred to have a detailed idea about subject matter and to give a firm structure to
project. Footnotes have also been given to acknowledge wherever necessary.

Method of Writing:

The method of writing followed in the course of this research project is primarily analytical.

Mode of Citation:

The researchers have followed a uniform mode of citation throughout the course of this project.

Aims and objectives:

1. To get the knowledge about various concepts and conventions.

2. To gain the knowledge of accountancy from legal perspective.

Research questions:

1. How many concepts and conventions are there in accounting?

2. What is importance of concepts and conventions in accounting?
3. What is difference between concepts and conventions.
4. How these are applicable during maintenance of books of accounts.

Hypothesis-

the researcher believes that concepts and conventions in accounting are very essential part
while maintain the books of accounting. Concepts are applicable at every level in every
business. In the other hand, conventions are sometimes differed in application. These concepts
and conventions assist the businessman to maintain their books of account properly

4
Table of Contents
1. Introduction- ............................................................................................................................. 6
1.1 GAAP, IFRS AND ACCOUNTING STANDARD ......................................................................... 6
1.2 DIFFERENCE BETWEEN PRINCIPLES AND POLICIES .............................................................. 7
2. CHARACTERISTICS OF CONCEPTS AND CONVENTIONS ............................................................... 8
2.1 Understandability............................................................................................................... 8
2.2 Relevance .......................................................................................................................... 8
2.3 Consistency ........................................................................................................................ 8
2.4 Comparability..................................................................................................................... 8
2.5 Reliability ........................................................................................................................... 8
3. CONCEPTS OF ACCOUNTING- ..................................................................................................... 9
3.1 BUSINESS ENTITY CONCEPT-.................................................................................................... 9
3.2 MONEY MEASUREMENT CONCEPT ..................................................................................... 9
3.3 COST CONCEPT ................................................................................................................ 10
3.4 GOING CONCERN CONCEPT.............................................................................................. 11
3.5 DUAL ASPECT CONCEPT ................................................................................................... 11
3.6 REALISATION CONCEPT .................................................................................................... 12
3.7 ACCRUAL CONCEPT .......................................................................................................... 12
3.8 ACCOUNTING PERIOD CONCEPT....................................................................................... 12
3.9 MATCHING CONCEPT ....................................................................................................... 13
3.10 OBJECTIVE CONCEPT ........................................................................................................ 13
4 CONVENTIONS OF ACCOUNTING ............................................................................................. 14
4.1 CONVENTION OF CONSISTENCY ....................................................................................... 14
4.2 CONVENTION OF CONSERVATISM .................................................................................... 15
4.3 CONVENTION OF DISCLOUSER.......................................................................................... 15
5. Analysis of concepts and principles through financial statement of Bajaj company- ................. 16
5.1 – financial statement of Bajaj company- ........................................................................... 16
5.2 Analysis of financial statement – .......................................................................................... 17
6. Conclusion ............................................................................................................................... 19
7. Bibliography- ........................................................................................................................... 20
7.1 books ............................................................................................................................... 20
7.2 websites........................................................................................................................... 20

5
1. Introduction-

1.1 GAAP, IFRS AND ACCOUNTING STANDARD

Accounting principles are uniform practices which entities follow to record, prepare and
present financial statements. An entity must prepare its financial statements as per acceptable
accounting principles in order to present true and fair view of state of affairs of entity.

In India, general accounting principles are accounting standards and Indian Accounting
Standards.

Uniform accounting principles assist in comparison of financial statement of entities. If

accounting principles followed are same then reader of financial statements can compare
financial results of two entities. However, if separate entities follow different accounting
principles, they should at first prepare financials as per same accounting principles and then
reader should make a comparison.

accounting principles given in Accounting Standards (AS) and Indian Accounting Standards
(Ind AS) are of great importance as it provides the basis for:

1. Recognition of an item as income, expense, asset or liability

2. At what amount it shall be recognised in the books of accounts and

3. How to present these items in statement of P&L or Balance sheet

4. It also provides what all disclosures are required to be made with respect to the items
recognised.

IFRS stands for International Financial Reporting Standards. This is a set of accounting
standards set by the International Accounting Standards Board (IASB), in London.

The IFRS was formed in 1973. Accounting bodies from Australia, Canada, France, Germany,
Japan, Mexico, Netherlands, the U.K., and the U.S. came together to form the IASC. It is
becoming the global standard for the preparation of public company financial statements and
is currently used in 144 out of 166 jurisdictions. IFRS is becoming more and more adopted
around the world, including in certain jurisdictions in the U.S. In addition, the IASB has
formalized a set of rules and standards for companies reporting their financial statements such
as the balance sheet, income statement, and statement of cash flows.

6
The IASB has more than a dozen consultative bodies, representing the many different
stakeholder groups that have an interest in and are affected by financial reporting. Accounting
principles guide entities on preparation and presentation of financial statements. It reduces the
inconsistencies, presents true and fair view of state of affairs and makes comparison easier.

1.2 DIFFERENCE BETWEEN PRINCIPLES AND

POLICIES

Accounting principles are different from accounting policies. Per se, accounting principles are
broader than accounting policies. Accounting principle has been defined above. Accounting
policies are accounting principles used in preparing, presenting and disclosing one specific
item.
For instance, depreciation is an accounting principle of amortising the amount of tangible
asset. Now depreciation can be charged by Straight Line Method (SLM), Written Down Value
(WDV) method, etc. Depreciation of tangible asset is an accounting principle whereas
following SLM method for depreciation is an accounting policy.

An entity incurred an expense on purchase of a machinery, whose benefit entity will have for
the next 5 years. In such case, entire expense should not be charged in the first year, it will be
matched with the benefits derived from such asset over 5 years. Now, entity can either follow
a policy to charge depreciation at Straight Line Method (SLM) or Written Down Vale (WDV).
If entity’s benefits flow in a straight line it can charge depreciation in a SLM. But, if the benefits
will be higher in the starting years, entity can charge depreciation using the WDV method.

7
2. CHARACTERISTICS OF CONCEPTS AND CONVENTIONS

2.1 Understandability
This implies the expression, with clarity, of accounting information in such a way that it will
be understandable to users - who are generally assumed to have a reasonable knowledge of
business and economic activities

2.2 Relevance
This implies that, to be useful, accounting information must assist a user to form, confirm or
maybe revise a view - usually in the context of making a decision (e.g. should I invest, should
I lend money to this business? Should I work for this business?)

2.3 Consistency
This implies consistent treatment of similar items and application of accounting policies

2.4 Comparability
This implies the ability for users to be able to compare similar companies in the same industry
group and to make comparisons of performance over time. Much of the work that goes into
setting accounting standards is based around the need for comparability.

2.5 Reliability
This implies that the accounting information that is presented is truthful, accurate, complete
(nothing significant missed out) and capable of being verified (e.g. by a potential investor).

8
3. CONCEPTS OF ACCOUNTING-
Accounting Concept defines the assumptions on the basis of which Financial Statements of a
business entity are prepared. Certain concepts are received assumed and accepted in accounting
to provide a unifying structure and internal logic to accounting process. The word concept
means idea or nation, which has universal application. Financial transactions are interpreted in
the light of the concepts, which govern accounting methods. Concepts are those basis
assumption and conditions, which form the basis upon which the accountancy has been laid.
Unlike physical science, Accounting concepts are only resulting of broad consensus. These
accounting concepts lay the foundation on the basis of which the accounting principles are
formulated

Now we shall study in detail the various concept on which accounting is based. The
following are the widely accepted accounting concepts.

3.1 BUSINESS ENTITY CONCEPT-

Entity Concept says that business enterprises are a separate identity apart from its owner.
Business transactions are recorded in the business books of accounts and owner’s transactions
in this personal back of accounts. The concept of accounting entity for every business or what
is to be excluded from the business books. Therefore, whenever business received cash from
the proprietor, cash a/c is debited as business received cash and capital/c is credited. So, the
concept of separate entity is applicable to all forms of business organization.

3.2 MONEY MEASUREMENT CONCEPT

As per this concept, only those transactions, which can be measured in terms of money are
recorded. Since money in the medium of exchange and the standard of economic value, this
concept requires that these transactions alone that are capable of being measured in terms of
money be only to be recorded in the books of accounts. For example, health condition of the
chairman of the company, working conditions of the workers, sale policy etc. do not find place
in accounting because it is not measured in terms of money.

Example:

Car – 2 No., Stock – 5 kgs

9
Furniture – 5 Chairs and two tables, Computer – 3

Land – 10 acres, Building Rs.10,000

From the above information, a person cannot prepare a statement informing that the total of
assets is 10,025 [i.e.10000+10+3+5+5+2]

This concept has the following limitation.

• It does not give a complete account of the happenings in business unit.

Example:

Strike in the factory

Sales manager is not speaking with production manager

• It is not capable of recording transactions which cannot be expressed in terms of

money.
• Employees are the assets of the organization

Though this concept has its own limitations, still it is used for accounting purposes, because
there is not better measurement scale other than this concept.

3.3 COST CONCEPT

By this concept, the value of assets is to be determined on the basic of historical cost.
Transaction are entered in the books of accounts at the amount actually involved. For example,
a machine purchased for Rs. 80000 and may consider it worth Rs. 100000, But the entry in the
books of account will be made with Rs. 80000 or the amount actually paid. The cost concept
does not mean that the assets will always be shown at cost. The assets may be recorded at the
time of purchase but it may be reduced its value be charging depreciation.

Many assets de not have acquisition cost. Human assets of an enterprises are an
example. The cost concept fails to recognize such assets although it is a very important assets
of any organization.

10
 3.4 GOING CONCERN CONCEPT
According to this concept the financial statements are normally prepared on the assumption
that an enterprise is a going concern and will continue in operation for the foreseeable future.
Transaction are therefore recorded in such a manner that the benefits likely to accrue in future
from money spent. It is because of this concept that fixed assets are recorded at their original
cost and depreciation in a systematic manner without reference to their current realizable value.

3.5 DUAL ASPECT CONCEPT

This concept is the care of double entry book-keeping. Every transaction or event has two
aspect. If any event occurs, it is bound to have two effect. For Rs.50000, on the other hand
stock will increase by Rs.50000 and other liability will increase by Rs.50000. similarly, is X
starts a business with a capital of Rs. 50000, while on the other hand the business has to pay
Rs. 50000 to the proprietor which is taken as proprietor’s Capital.

1st Aspect 2nd Aspect

Asset increases Purchase of Machinery Asset decreases Payment of Cash

Asset increases Purchase of Machinery Liability increases Payment at future

date [on credit basis]

Asset decreases Payment of Cash Liability decreases Settlement of Liability

Liability increases Bank loan obtained Liability decreases Payment to creditors

[using the loan amount]

Alternatively,

1st Aspect 2nd Aspect

Asset decreases Asset increases

Liability increases Asset increases

Liability decreases Asset decreases

11
Liability decreases Liability increases

3.6 REALISATION CONCEPT

It closely follows the cost concept any change in value of assets is to be recorded only when
the business realizes it. i.e. either cash has been received or a legal obligation to pay has been
assumed by the customer. No Sale can be said to have taken place and no profit can be said to
have arisen. It prevents business firm from inflating their profit by recording sale and income
that are likely to accrue, i.e. expected income or gain are not recorded.

3.7 ACCRUAL CONCEPT

Under accrual concept the effect of transaction and other events are recognized on mercantile
basic. When they accrue and not as cash or a cash equivalent is received or paid and they are
recorded in the accounting record and reported in the financial statements of the periods to
which they relate financial statement prepared on the accrual basic inform users not only of
past events involving the payment and receipt of cash but also of obligation to pay cash in the
future and of resources that represent cash to be received in the future. For Example: - Mr. Raj
buy clothing of Rs. 50000, a paying cash Rs. 20000 and sells at Rs. 60000 of which customer
paid only Rs. 40000. So, his revenue is Rs. 60000, not Rs. 40000 cash received. Exp. Or Cash
is Rs. 50000, not Rs. 20000 cash paid. So, the accrual concept-based profit is Rs. 10000
(Revenue- Exp.)

3.8 ACCOUNTING PERIOD CONCEPT

This is also called the concept of definite periodicity concept as per going concept on indefinite
life of the entity is assumed for a business entity it causes inconvenience to measure
performance achieved by the entity in the ordinary causes of business. Therefore, a small but
workable fraction of time is chosen out of infinite life cycle of the business entity for measure
the performance and loading at the financial position 12 months period is normally adopted for
this purpose accounting to this concept accounts should be prepared after every period & not t
the end of the life of the entity. Usually this period is one calendar year. In India we follow
from 1st April of a year to 31st March of the immediately following years. Now a day because

12
of the need of management, final accounts are prepared at shorter intervals of quarter year or
in some cases a month such accounts are know a interim account.

3.9 MATCHING CONCEPT

In this concept, all exp. Matched with the revenue of that period should only be taken into
consideration. In the financial statements of the organization. If any revenue is recognized that
exp. Related to earn that revenue should also be recognized. This concept as it considers the
occurrence of exp. And income and do not concentrate on actual inflow or outflow of cash.
This leads to adjustment of certain items like prepaid and outstanding expenses, unearned or
accrued income.

It is not necessary that every exp. Identity every income. Some exp. Are directly related
to the revenue and some are directly related to sale but rent, salaries etc. are recorded on accrual
basis for a particular accounting period. In other words, periodicity concept has also been
followed while applying matching concept.

3.10 OBJECTIVE CONCEPT

As per this concept, all accounting must be based on objective evidence. In other words, the
transactions recorded should be supported by verifiable documents. Only than auditors can
verify information record as true or otherwise. The evidence should not be biased. It is for this
reasons that assets are recorded at historical cost and shown thereafter at historical lass
depreciation. If the assets are shown on replacement cost basis, the objectivity is lost and it
became difficult for auditors to verify such value, however, in resent year replacement cost are
used for specific purpose as only they represent relevant costs. For example, to find out intrinsic
value of share, we need replacement cost of assets and not the historical cost of the assets.

13
4 CONVENTIONS OF ACCOUNTING
The term “Accounting Conventions” refers to the customs or traditions which are used as a
guide in the preparation of accounting reports and statements. The conventions are derived by
usage and practice. The accountancy bodies of the world may charge any of the convention to
improve the quality of accounting information accounting conventions need not have universal
application. Following are important accounting conventions in use-

4.1 CONVENTION OF CONSISTENCY

According to this convention the accounting practices should remain unchanged from one
period to another. It requires that working rules once chosen should not be changed arbitrarily
and without notice of the effect of change to those who use the accounts. For example, stock
should be valued in the same manner every year. Similarly, depreciation is charged on fixed
assets on the same method year after year. If this assumption is not followed, the fact should
be disclosed together with reasons.

The principle of consistency plays its role particularly when alternative accounting
methods is equally acceptable. Any change from one method to another method would result
in inconsistency; they may seem to be inconsistent apparently. In case of valuation of stocks if
the company applies the principle “at cost or market price whichever is less” and if this
principle accordingly results in the valuation of stock in one year at cost and the market price
in the other year, there is no inconsistency here. It is only an application of the principle.

An Enterprise should change its accounting policy in any of the following

circumstances only.

(i) To bring the books of accounts in accordance with the issued accounting standard.

(ii) To compliance with the provision of law.

(iii) When under changed circumstances it is felt that new method will reflect truer and fairer
picture in the financial statement.

14
 4.2 CONVENTION OF CONSERVATISM
This is the policy of playing sale game. It takes into consideration all prospective losses but
leaves all prospective profits financial statements are usually drawn up on a conservative basis
anticipated profit are ignored but anticipated losses are taken into account while drawing the
statements following are the examples of the application of the convention of conservatism.

(i) Making the provision for doubtful debts and discount on debtors.

(ii) Valuation of the stock at cost price or market price whichever is less.

(iii) Charging of small capital items, like crockery to revenue.

(iv) Showing joint life policy at surrender value as against the actual amount paid.

(v) Not providing for discount on creditors.

4.3 CONVENTION OF DISCLOUSER

Apart from statutory requirement, good accounting practice also demands that significant
information should be disclosed in financial statements. Such disclosures can also be made
through footnotes. The purpose of this convention is to communicate all material and relevant
facts concerning financial position and results of operations to the users. The contents of
balance sheet and profit and loss account are prescribed by law. These are designed to make
disclosures of all materials facts compulsory. The practice of appending notes relative to
various facts and items which do not find place in accounting statements is in pursuance to the
convention of full disclosure of material facts. For example:

(a) Contingent liability appearing as a note.

(b) Market value of investments appearing as a note.

The convention of disclosure also applies to events occurring after the balance sheet
date and the date on which the financial statement is authorized for issue. Such events include
bad debts, destruction of plant and equipment due to natural calamities’, major acquisition of
another enterprises, etc. such events are likely to have a substantial influence on the earnings
and financial position of the enterprises. Their not-disclosure would affect the ability of the
users for evaluations and decisions.

15
5. Analysis of concepts and principles through financial
statement of Bajaj company-

5.1 – financial statement of Bajaj company-

16
 5.2 Analysis of financial statement –
This is the balance sheet of Bajaj company for at the end of the financial year 2017-2018. From
the above balance Sheet, we can see the applicability of concepts and conventions of
accounting in books. All the above discussed concepts have been followed in this Balance
Sheet.

For example- business entity concept- company has recorded transactions related to its
business, no personal profit or expense has been mentioned here.

Similarly, it is prepared at the of the year 31-03-2017. Therefore, accounting period concept
has been followed.

All the transactions are recorded on the basis of Money measurement concept.

Dual aspect concept is clearly shown since the total liabilities and assets are equal. Assets and
liabilities are equal in the business.

Matching concept for example both income and expenses are matching.

cost concept is followed because every assets value has been recorded on its cost.

17
Accrual concepts and realisation concepts are also considered in this balance sheet.

While conventions have also been followed at the time of preparing balance sheet.

Convention of discloser- every information relating to business has been recorded. So that no
ambiguity remains in minds of clients.

Convention of materiality- accountant has recorded main information which are useful.
Insignificant information has been avoided.

Convention of consistency- all the method valuation of stock, depreciation, amortization have
been followed consistently. So that there is clarity in the accounts. Therefore, it is also followed
properly.

18
 6. Conclusion
To sum up, the accounting concept and conventions outline those points on which the financial
accounting is based. Accounting concept does not rely on accounting convention; however,
accounting conventions are prepared in the light of accounting concept. Accounting not only
records financial transactions and conveys the financial position of a business enterprise; it also
analyses and reports the information in documents called “financial statements.”

Recording every financial transaction is important to a business organisation and its creditors
and investors. Accounting uses a formalised and regulated system that follows standardised
principles and procedures.

By following these concepts and conventions in the books of account information of business
is reliable and true. Client can easily find clear picture of business and not only client but also
this is helpful in government agencies and income tax departments.

Comparison between businesses get easy and no confusion remain in the mind of client.
Decision made on the basis of these information are logical and true. But not every time since
many concepts and conventions are have some drawbacks and due to these drawbacks
information sometimes can be partial incorrect.

19
 7. Bibliography-

7.1 books
• Accountancy PART 1 (NCERT) – D.K GOEL, SHELLY GOEL, RAJESH GOEL.
• Accountancy part 1 (NCERT)- T.S GREWAL

7.2 websites
https://keydifferences.com/difference-between-accounting-concept-and-convention.html

https://phdessay.com/accounting-concepts-and-conventions/

20