Accounting concept principles and convention

INTRODUCTION
Let us imagine a situation where you are a proprietor and you take copies of your books of account to ve
dierent accountants. You ask them to prepare the nancial statements on the basis of the above records
and to calculate the prots of the business for the year. After few days, they are ready with the nancial
statements and all the ve accountants have calculated ve dierent amounts of prots and that too with
very wide variations among them. Guess in such a situation what impact would it leave on you about
accounting profession. To avoid this, a generally accepted set of rules have been developed. This generally
accepted set of rules provides unity of understanding and unity of approach in the practice of accounting
and also in better preparation and presentation of the nancial statements.
Accounting is a language of the business. Financial statements prepared by the accountant communicate
nancial information to the various stakeholders for decision-making purpose. Therefore, it is important
that nancial statements prepared by dierent organizations should be prepared on uniform basis. Also
there should be consistency over a period of time in the preparation of these nancial statements. If every
accountant starts following his own norms and notions for accounting of dierent items then there will be
an utter confusion.
Money measurement concept
Entity concept
Cost concept
Periodicity concept
Realisation concept
Accrual concept
Dual aspect concept
Matching concept
Conservatism
Going Concern concept
Consistency
Materiality
Concepts, Principles, Conventions

To avoid confusion and to achieve uniformity, accounting process is applied within the conceptual
framework of ‘Generally Accepted Accounting Principles’ (GAAPs). The term GAAPs is used to describe rules
developed for the preparation of the nancial statements and are called concepts, conventions, postulates,
principles etc. These GAAPs are the backbone of the accounting information system, without which the
whole system cannot even stand erectly. These principles are the ground rules, which dene the parameters
and constraints within which accounting reports are generated. Accounting principles are basic norms and
assumptions on which the whole accounting system has been developed and established. Accountant
also adheres to various accounting standards issued by the regulatory authority for the standardization of
accounting policies to be followed under specic circumstances. These conceptual frameworks, GAAPs and
accounting standards are considered as the theory base of accounting.
2.2 ACCOUNTING CONCEPTS
Accounting concepts dene the assumptions on the basis of which nancial statements of a business
entity are prepared. Certain concepts are perceived, assumed and accepted in accounting to provide a
unifying structure and internal logic to accounting process. The word concept means idea or notion, which
has universal application. Financial transactions are interpreted in the light of the concepts, which govern
accounting methods. Concepts are those basic assumptions and conditions, which form the basis upon
which the accountancy has been laid. Unlike physical science, accounting concepts are only result of broad
consensus. These accounting concepts lay the foundation on the basis of which the accounting principles
are formulated.
2.3 ACCOUNTING PRINCIPLES
“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 selection of conventions or
procedures where alternatives exist.”
Accounting principles must satisfy the following conditions:
1. They should be based on real assumptions;
2. They must be simple, understandable and explanatory;
3. They must be followed consistently;
4. They should be able to reect future predictions;
5. They should be informational for the users.
2.4 ACCOUNTING CONVENTIONS
Accounting conventions emerge out of accounting practices, commonly known as accounting principles,
adopted by various organizations over a period of time. These conventions are derived by usage and
practice. The accountancy bodies of the world may change any of the convention to improve the quality of
accounting information. Accounting conventions need not have universal application.
In the study material, the terms ‘accounting concepts’, ‘accounting principles’ and ‘accounting conventions’
have been used interchangeably to mean those basic points of agreement on which nancial accounting
theory and practice are founded.