Accounting Concepts & Conventions Essay Sample

1. Define Accounting.
Autonomic nervous system: The American Institute of Certified Public Accountants ( AICPA ) defines Accounting as “the art of entering. classifying and summarizing in a important mode in footings of money. minutess and events which are. in portion at least of a fiscal character. and construing the consequences thereof. ”

2. What is GAAP?
Autonomic nervous system: By and large Accepted Accounting Principles – GAAP
The common set of accounting rules. criterions and processs that companies use to roll up their fiscal statements. GAAP are a combination of important criterions ( set by policy boards ) and merely the normally recognized ways of recording and describing accounting information.

3. What are the types of histories?
Autonomic nervous system: The concern minutess can be grouped under three types of histories:

* Personal histories
* Real histories
* Nominal histories

4. What is meant by book maintaining?
Autonomic nervous system: Bookkeeping is the recording of fiscal minutess. Minutess include gross revenues. purchases. income. and payments by an person or organisation. Bookkeeping is normally performed by a bookkeeper.

5. What are the phases of accounting rhythm?
Autonomic nervous system: Stairss in the Accounting Cycle
* Identify the Transaction
* Analyze the Transaction
* Journal Entries
* Post to Ledger
* Trial Balance
* Adjusting Entries
* Adjusted Trial Balance
* Financial Statements
* Closing Entries
* After-Closing Trial Balance.

6. What are Debit and Credit regulations of dual entry system? Ans: Debits are recorded on the left side of a T history in a leger. Debits addition balances in plus histories and expense histories and lessening balances in liability histories. gross histories. and capital histories. Creditss are recorded on the right side of a T history in a leger. Creditss addition balances in liability histories. gross histories. and capital histories. and lessening balances in plus histories and expense histories.

Debit histories are plus and disbursal histories that normally have debit balances. i. e. the entire debits normally exceeds the entire credits in each debit history. Recognition histories are gross ( income. additions ) histories and liability histories that normally have recognition balances. 7. What is history ting equation?

Autonomic nervous system: The equation that is the foundation of dual entry accounting. The accounting equation shows that all assets are either financed by borrowing money or paying with the money of the company’s stockholders. Therefore. the accounting equation is: Assetss = Liabilitiess + Shareholder Equity. 8. Who are the users of accounting information

Autonomic nervous system: Accounting. as an information system is really helpful to parties interested in it such as proprietors. direction. creditors. employees. bankers. authorities and stockholders. Accounting straight or indirectly is of primary importance to owners and manahers. The two chief classs of users are ( a ) internal users ( B ) external users Internal users

Internal users comprise proprietors. direction and employees who are interested in the accounting information associating to concern. * Owners. i. e. stockholders. spouses and owners: they are the anchor of the concern in the sense that they provide necessary financess for it smooth running. growing and development. There is ever a acute desire on their portion on profitableness. increasing turnover. stable or lifting dividend rate. sound fiscal place and conctantly turning spread outing concern volume along with future gaining possible and growing chances. Such information demands of this group are satisfied through published histories. one-year study and other auxiliary statements.

* Management: direction may dwell of board of managers ( i. e. top direction ) of the company. in-between direction and departmental caputs or supervisors ( lower degree direction ) . who are entrusted with the undertaking of policy preparation. policy executing or execution and overall supervising severally. Accounting information. neither the aims of endeavor can be laid down. nor the rating of public presentation becomes possible. The managerial tools such as production budget. gross revenues budget and hard currency budget and maestro budget are the progenies of accounting statements and studies.

* Employees: healthy industrial dealingss. i. e. employees ( direction ) and employee ( merchandise brotherhood ) relation are a must for the prosperity and growing of the endeavor. This is possible merely through decently motivated. satisfied labour force. Accounting information helps settle industrial differences. avert compensation. more fringe benefits. better working conditions and so on.

External users
External users like creditors. investors. authorities. clients. research workers and aliens are besides helpful in accounting information due to the undermentioned grounds * Creditors: trade creditors are those who supply goods on recognition footing in expectancy that they will acquire their full payment on or before the due day of the month. Normally they extend recognition for a really short period and hence are acute to cognize whether or non the endeavor will be able to run into its fiscal committednesss or duties in clip. Accounting statements help to find a company’s short-run solvency and liquidness place on which creditors can trust and reexamine their recognition policy or supply determinations.

* Investors: the investor’s determination of their investing depends upon three factors. i. e. safety of investing ( chief ) . consistence in rate of return ( dividend ) and regularity of return. Their analysis covers by. nowadays and future profitableness. dividend policy and output. Their determinations are besides guided by viability of present undertakings. future chances. growing and enlargement programs. The accounting statements and one-year studies provide necessary information to confirm their investing determinations. This group consists of banking. finance. mortgage. insurance companies and persons.

* Government bureaus: authorities bureaus include revenue enhancement governments and regulative organic structures. such as ministry of trade and commercialism. company jurisprudence board. registrar of joint stock companies. security exchange board of India ( SEBI ) . These bureaus want to guarantee whether all the regulations refering to the readying. presentation and revelations have punctually been complied with or non. therefore doing the accounting information available to assorted authorities bureaus for different intents. For illustration. income revenue enhancement section shall be interested in doing proper appraisal of revenue enhancement liability. While the regulative bureaus are concerned with the undertaking of protecting and safeguarding the involvement of investors and public at big. Government seekd information for bordering concern policies in the involvements of the society and supplying necessary way to the concern activity in conformity with national precedences and ends. The cardinal structural organisation uses this information for calculating national income.

* Customers: the populace as clients is interested in accounting statements and studies with the object to cognize whether control is exercised on production. merchandising and distribution disbursals. etc. as it affects the monetary value of goods. Recently. clients protection association have been formed to exert control on the concern and industry and besides to do them cognizant of ‘social responsibility’ .

* Research workers: research workers while construing the fiscal statements may supply some starling facts and findings. which may be used by the authorities to put its economic policy. or by regulative bureaus to take regulative steps. and by direction to reexamine its ain policies. Therefore these statements are of much importance to scholars undertaking research in accounting theory every bit good as concern personal businesss and patterns.

* Foreigners: aliens are besides lament on accounting information due to foreign coaction like joint ventures. amalgamations and acquisitions of Indian companies with multi-national corporations.

* Others: this is the residuary category which includes the remainder of the users of accounting information. such as enterprisers. revenue enhancement governments. stock exchanges. media. political parties. etc. they are by and large interested in the wellbeing and prosperity of concern endeavors and their impact on societal. economic. fiscal and concern environment. Thus we can state that usage of accounting information is so thorough that no 1 can be spared from its utilizations and benefits. 9. Explain all accounting constructs

Autonomic nervous system: The term “concept” means an thought or idea. So. accounting constructs are the cardinal thoughts or basic premises underlying the theory and pattern of accounting. In other words accounting constructs are the wide working regulations of accounting patterns. They are developed over a period of clip in responses to altering concern environment. They are developed and accepted by the accounting profession.

There are a figure of accounting constructs. The of import accounting constructs are:
1 ) Money measuring construct
2 ) Separate entity construct
3 ) Going-concern construct
4 ) Cost construct
5 ) Dual facet construct
6 ) Accounting period construct
7 ) Objective grounds construct
8 ) Realization construct
9 ) Accrual construct
10 ) Matching construct

Money measuring construct:
In accounting. a record is made merely of those minutess or events which can be measured and expressed in footings of money. Minutess or events which can non be expressed in footings of money do non happen topographic point in the books of histories though they may be really utile for the concern. Separate entity construct. concern entity construct. economic entity construct or accounting entity construct: In accounting. concern is treated as separate entity from its proprietors. Histories are prepared to give information about the concern and non about those who own it. A differentiation is made between concern minutess and personal minutess. Without such a differentiation. the personal businesss of the concern will be mixed up with the private personal businesss of the owner and the true image of the house will non be available. The ‘Business’ and ‘owner’ are taken as two separate entities. The comptroller is interested to enter minutess associating to concern merely. The private minutess of the proprietor will be recorded individually and will hold no bearing on the concern minutess. All the minutess of the concern are recorded in the books of the concern from the point of position of the concern as an entity and even the owner is treated as a creditor to the extent of his capital.

Going-concern construct:
In accounting an endeavor is regarded as a traveling concern construct ( i. e. a concern that will go on to run for an indefinitely long period of clip ) there is neither the connotation nor the necessity to weave up the concern in the foreseeable hereafter. It may be noted that this construct does non intend lasting continuation of a concern. All that it means is that a concern endeavor will go on to run for a reasonably long period of clip.

Cost construct:
Harmonizing to this construct. an plus in normally recorded in the books at the monetary value at which it was acquired ( i. e. . at its cost monetary value ) and non on market monetary value. This cost serves the footing for the accounting of this plus during the subsequent period. The ‘cost’ should non be confused with ‘value’ . It must be remembered that as the existent worth of the assets changes from clip to clip. it does non intend that the value of such an plus is wrongly recorded in the books. Double facet construct:

Every concern minutess ever result in receiving of some benefit of some value and repaying of some other benefit of equal value. Every dealing is recorded on the footing of this construct.

Accounting period construct or cyclicity of histories:
Harmonizing to this construct. the life of the concern is divided into appropriate sections for analyzing the consequences shown by the concern after each section. It is supported by traveling concern construct. All the minutess are recorded in the books of histories on the premise that net incomes on these minutess are to be ascertained for a specified period. This is known as accounting period construct. Objective grounds construct:

Harmonizing to this construct all accounting minutess should be evidenced and supported by nonsubjective paperss. These paperss include bills. contract. correspondence. verifiers. measures. bankbooks. check etc. Realization construct:

This construct states that gross from any concern dealing should be included in the accounting records merely when it is realized. The term realisation means creative activity of legal right to have money. Selling goods is realisation. having order is non. Accrual construct:

The significance of accrual is something that becomes due particularly an sum of money that is yet to be paid or received at the terminal of the accounting period. It means that grosss are recognized when they become receivable. Though hard currency is received or non received and the disbursals are recognized when they become collectible though hard currency is paid or non paid. Matching construct:

The fiting construct provinces that the gross and the disbursals incurred to gain the grosss must belong to the same accounting period. So one time the gross is realized. the following measure is to apportion it to the relevant accounting period. This can be done with the aid of accrual construct. 10. Explain all the accounting conventions

Autonomic nervous system: An accounting convention refers to common patterns which are universally followed in recording and showing accounting information of the concern entity. They are followed like imposts. tradition. etc. in a society. The most of import conventions which have been used for a long period are as follows: * Convention of consistence.

* Convention of full revelation.
* Convention of materiality.
* Convention of conservativism.

Convention of consistence:
The convention of consistence agencies that same accounting rules should be used for fixing fiscal statements twelvemonth after twelvemonth. A meaningful decision can be drawn from fiscal statements of the same endeavor when there is comparing between them over a period of clip. But this can be possible merely when accounting policies and patterns followed by the endeavor are unvarying and consistent over a period of clip. Convention of full revelation:

This convention requires that all stuff and relevant facts refering fiscal statements should be to the full disclosed. Full revelation means that there should be full. just and equal revelation of accounting information. Adequate means sufficient set of information to be disclosed. Fair indicates an just intervention of users. Full refers to finish and elaborate presentation of information. Therefore. the convention of full revelation suggests that every fiscal statement should to the full unwrap all relevant information. Convention of materiality:

The convention of materiality provinces that. to do fiscal statements meaningful. merely material fact i. e. of import and relevant information should be supplied to the users of accounting information. The inquiry that arises here is what a material fact is. The materiality of a fact depends on its nature and the sum involved. Material fact means that the information of which will act upon the determination of its user.

Convention of conservativism:
This convention is based on the rule that “Anticipate no net income. but supply for all possible losses” . It provides counsel for entering minutess in the books of histories. It is based on the policy of playing safe in respect to demoing net income. The chief aim of this convention is to demo minimal net income. Net income should non be overstated. If net income shows more than existent. it may take to distribution of dividend out of capital. This is non a just policy and it will take to the decrease in the capital of the endeavor. Therefore. this convention clearly states that net income should non be recorded until it is realized. But if the concern anticipates any loss in the close hereafter. proviso should be made in the books of histories for the same.