CONCEPTS, CONVENTIONS &   STANDARDS

Points to remember –

REAL ACCOUNT-

• RECIEPT & PAYMENT ACCOUNT

NOMINAL  ACCOUNT-

• TRADING ACCOUNT

• PROFIT AND LOSS ACCOUNT

• INCOME & EXPENDITURE ACCOUNT

Statement of Affairs-

Statement of Affairs is a statement showing assets, liabilities and capital of the entity prepared on the basis of a single entry system of bookkeeping.

Balance Sheet-

A Balance Sheet is a statement showing assets, liabilities and equity of the company prepared on the basis of the double entry system of bookkeeping.

CONVENTIONS-

An accounting convention refers to common practices which are universally followed in recording and presenting accounting information of the business entity.

VALUATION OF CLOSING STOCK-

CONVENTIONS-

• Convention of consistency
• Convention of full disclosure.
•  Convention of materiality.
•  Convention of conservatism.
• Convention of consistency

The convention of consistency means that same accounting principles should be used for preparing financial statements year after year. A meaningful conclusion can be drawn from financial statements of the same enterprise when there is comparison between them over a period of time.

TYPES OF CONSISTENCY:

•  VERTICAL CONSISTENCY ( Same Organisation)

It occurs when fixed assets have been shown at cost price and in the interrelated income statement depreciation has also been charged on the historical cost of the assets.

•  HORIZONTAL  CONSISTENCY  (Time basis)

This consistency is to be found between financial statements of one entity from period to period.

•  DIMENSIONAL CONSISTENCY  (Two organisations in the same  trade)

This consistency is to be found between financial statements of one entity from period to period.

Therefore, as per this convention the same accounting methods should be adopted every year in preparing financial statements.

CONVENTION OF CONSERVATISM

This convention is based on the principle that “Anticipate no profit, but provide for all possible losses”. It provides guidance for recording transactions in the books of accounts. The main objective of this convention is to show minimum profit. Profit should not be overstated.

CONVENTION OF FULL DISCLOSURE

Convention of full disclosure requires that all material and relevant facts concerning financial statements should be fully disclosed. Full disclosure means that there should be full, fair and adequate disclosure of accounting information. Adequate means sufficient set of information to be disclosed. Fair indicates an equitable treatment of users. Full refers to complete and detailed presentation of information. Thus, the convention of full disclosure suggests that every financial statement should fully disclose all relevant information.

1. The convention of full disclosure requires that there should be full, …………… and …………… disclosure of accounting information.

1. Adequate & complete
2. Relevant & adequate
3. Fair & relevant
4. Fair & adequate

ANSWER -  Fair & adequate

2. Precious metals, like gold, mineral and others are generally valued at  -

1. Market price
2. Cost price
3. List price
4. None of the above

ANSWER - Market price

3. As per the convention of …………. year after year same methods are followed.

1. Conservatism
2. Materiality
3. Consistency
4. Full disclosure

ANSWER – Consistency

4. Convention of materiality states that insignificant items should be disclosed under …………

1. Same head
2. Separate head
3. Major head
4. None of the above

ANSWER – Separate head

5………… convention states that to make financial statements more meaningful, only significant and important items should be supplied to the users.

1. Conservatism
2. Materiality
3. Consistency
4. Full disclosure

ANSWER – Materiality

FEW FULL FORMS

IFRS – INTERNATIONAL FINANCIAL REPORTING STANDARDS

GAAP – GENERALLY ACCEPTED ACCOUNTING PRINCIPLES