Computerized Accounting

Introduction Before explaining computerized accounting, let us discuss how an accounting system can be represented: The purpose of accounting is to provide information used in decision making. Accounting may be viewed as a system (a process) that converts data into useful information. The information processes include recording, maintaining and reporting. Every business has numerous processes. …

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Accounting Conventions

What are Accounting Conventions? Accounting conventions are ‘general rules of practice’ formulated out of customs, usages and traditions as guiding principles for accounting. The accounting follows these rules on a conviction that the accounting practices should be consistent, the financial statements should be prepared on a conservative basis to mitigate the risk of loss and …

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Accrual Concept of Accounting

What does the accrual concept of accounting mean? – Definition The accrual concept of accounting is based on the economic premise that profits are best measured by changes in owner’s equity between the beginning and the end of any accounting period. Explanation As we know in relation to the accounting equivalence concept, when sales of …

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Conservatism Principle of Accounting

What is meant by the accounting term “Conservatism”? Conservatism is the prudence exercised in financial reporting as a result of the uncertainties surrounding business and economic activities. when faced with accounting alternatives accountants tend to choose those that are least likely to overstate assets or income. Conservatism Principle For historical reasons, an accountant is always …

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Cash vs Accrual Basis of Accounting

Cash basis vs accrual basis of accounting – Definition The cash basis and the accrual basis are the two basic methods of accounting. Each method identifies a different set of rules for recognizing revenues and expenses. The accrual basis of accounting means that revenues, expenses, and other changes in assets, liabilities, and owners’ equity are …

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Responsibility Accounting

What is Responsibility Accounting? – Definition Responsibility Accounting is a basic part of good budgeting; budgets should be prepared by the people who will be responsible for achieving them. Explanation Budgets should be prepared by the individuals who will be responsible for achieving them. This ensures that full use is made of the knowledge of …

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Advantages of adhering to accounting concepts and principles

The following advantages are associated with proper use of accounting concepts and principles: Accounts prepared in accordance with generally accepted accounting principles and concepts are more accurate and reliable. The users of financial statements attach greater credibility to the statements that have been prepared in accordance with generally accepted accounting principles. Hence, if a business …

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Business entity concept

Business Entity Concept – Definition The business entity concept states that a business is an entity in itself and it should be treated as a separate person which is different from its owner. Business entity concept is also known as a separate entity concept and economic entity concept. Under the Business entity concept, it is assumed that for …

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Monetary Unit Assumption

Definition Monetary unit assumption (also known as money measurement concept) states that all accounting records should be made in terms of monetary units. All transactions are measured in monetary units and recorded in the books of accounts in terms of money which is generally the currency unit used in the country. In the United States, for …

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Going concern concept

Definition: What is Going Concern Concept? The going concern concept states that all records are made on the assumption that the business will continue for the foreseeable future. Unless it is known that the business will close down at a determinable time, all transactions are recorded in a routine manner and there is no need …

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Dual aspect concept of accounting

What does the dual aspect concept mean? – Definition The dual aspect concept of accounting relates to the idea of double-entry bookkeeping. Every transaction affects the business in at least two aspects. These two aspects are equal and opposite in nature. It is also known as the accounting equivalence concept. Explanation To ensure a comprehensive …

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Principle of adequate disclosure

Definition and explanation The Principle of adequate disclosure demands full disclosure of all material matters which can affect the financial statements and are of the interest of users of accounting information. It requires the disclosure of appropriate changes in financial statements which can be more useful and not misleading to its users. Thus according to …

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Materiality concept of accounting

What is the Materiality Concept? – Definition Materiality Concept of Accounting is an accounting convention that refers the relative importance or significance of an item to an informed decision-maker. Explanation The materiality concept of accounting guides about recognition of a transaction. It means that transaction which is of insignificance importance should not be recorded. A …

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Consistency principle of accounting

What is the Consistency Principle? -Definition The Consistency principle of accounting states that once an entity has adopted a certain practice and method, it should use same practice and method for subsequent events of the same nature unless it has a sound reason to change them. Explanation Sometimes accountant has to deal with such issues …

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Accounting period concept

Definition This concept requires that the life of business should be segregated into equal parts which are termed as Accounting Periods. This concept requires consistency of accounting periods. Explanation This concept helps in estimating the profit or loss and financial position of a business for a particular period. If there are different accounting periods then various …

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Principle of objective evidence

Definition and Explanation Principle of objective evidence (or principle of objectivity) states that no accounting record should be made unless it is supported by independently verifiable (i.e., objective) evidence. Generally, such evidence is in writing or should be reduced to writing before an accounting entry is made. All transactions must be evidenced by a document, e.g., …

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Prudence principle

What is Prudence Principle of Accounting? – Definition Prudence principle (Conservatism Principle) of accounting states that a business should display a good degree of caution in booking incomes and expenses. It is considered wise to book an income only when it is realized but to book an expense as soon as a reasonable likelihood of …

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Realization Principle of accounting

Realization principle of accounting – Definition The realization principle of accounting revolves around the determination of the point of time when revenues are earned. The concept followed is that revenue is realized when goods and services produced by a business enterprise are transferred to a customer either for cash or some other asset or for …

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Accounting Principles and Concepts MCQs Test

Now it’s time to assess how much you have learned about Accounting principles and concepts. We have prepared the MCQs quiz for this chapter. Go and take the quiz to clear your concepts about Accounting principles and concepts. If you face any difficulty to answer the question we advise you to read this topic thoroughly …

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