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    Accounting Conventions and Equation

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    anurag
    This document discusses accounting conventions, the accounting equation, and some examples. It covers the following key points: 1) Accounting principles are based on conventions like conservatism, full disclosure, consistency, materiality, and accuracy. Conventions help standardize accounting practices. 2) The accounting equation is Assets = Liabilities + Owner's Equity, representing that assets are equal to liabilities plus the owner's claim on the remaining assets. 3) Examples show how the accounting equation is used to track changes in a business's assets, liabilities, and owner's equity as transactions occur.

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    Accounting Conventions and Equation

    Uploaded by

    anurag
    65 views33 pages
    This document discusses accounting conventions, the accounting equation, and some examples. It covers the following key points: 1) Accounting principles are based on conventions like conservatism, full disclosure, consistency, materiality, and accuracy. Conventions help standardize accounting practices. 2) The accounting equation is Assets = Liabilities + Owner's Equity, representing that assets are equal to liabilities plus the owner's claim on the remaining assets. 3) Examples show how the accounting equation is used to track changes in a business's assets, liabilities, and owner's equity as transactions occur.

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    ACCOUNTING CONVENTIONS AND EQUATION

    Original Title

    ACCOUNTING CONVENTIONS AND EQUATION

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    This document discusses accounting conventions, the accounting equation, and some examples. It covers the following key points: 1) Accounting principles are based on conventions like conservatism, full disclosure, consistency, materiality, and accuracy. Conventions help standardize accounting practices. 2) The accounting equation is Assets = Liabilities + Owner's Equity, representing that assets are equal to liabilities plus the owner's claim on the remaining assets. 3) Examples show how the accounting equation is used to track changes in a business's assets, liabilities, and owner's equity as transactions occur.

    Copyright:

    © All Rights Reserved
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    Download as pptx, pdf, or txt
    65 views33 pages

    Accounting Conventions and Equation

    Uploaded by

    anurag
    This document discusses accounting conventions, the accounting equation, and some examples. It covers the following key points: 1) Accounting principles are based on conventions like conservatism, full disclosure, consistency, materiality, and accuracy. Conventions help standardize accounting practices. 2) The accounting equation is Assets = Liabilities + Owner's Equity, representing that assets are equal to liabilities plus the owner's claim on the remaining assets. 3) Examples show how the accounting equation is used to track changes in a business's assets, liabilities, and owner's equity as transactions occur.

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    of 33

    ACCOUNTING

    CONVENTIONS &
    ACCOUNTING EQUATION

    DR.ANURAG KUMAR
    ACCOUNTING
    CONVENTIONS
    ACCOUNTING PRINCIPLES ARE
    BASED ON ACCOUNTING
    CONCVENTIONS. CONVENTION IS
    USED TO SIGNIFY CUSTOMS OR
    TRADITIONS ACCOUNTING
    CONVENTIONS ARE THE COMMON
    PRACTICES WHICH ARE
    UNIVERSALLY FOLLOWED IN
    RECORDING AND PRESENTING
    ACCOUNTING INFORMATION OF
    BUSINESS. IT HELPS IN COMPARING
    ACCOUNTING DATA OF DIFFERENT
    BUSINESS OR OF SAME UNITS FOR
    DIFFERENT PERIODS.
    TYPES OF ACCONTING
    CONVENTIONS:

    1.Convention of Conservatism
    2.Convention of Full disclosure
    3.Convention of Consistency
    4. Convention Of Materiality
    5.Convention Of Accuracy
    1. CONVENTION
    OF Following this convention,
    CONSERVATISM stock is valued at the cost price
    or market price whichever is
    lower. According to this
    convention an accountant
    should record lowest possible
    value for assets and revenues
    and highest possible value for
    liabilities and expenses .

    •.
    ANTICIPATE NO
    PROFITS BUT
    PROVIDE FOR ALL
    LOSSES

    Accountant should
    always be on side of
    safety.
    FOR EXAMPLE

    • Making Provision for Bad and Doubtful


    Debts
    • Showing Depreciation on Fixed Assets,
    but not appreciation
    2.
    CONVENTION
    OF FULL
    DISCLOSURE
    This convention requires that all
    material and relevant facts
    related to operating and
    financial performance must be
    fully disclosed in the financial
    statements of the concern in fair
    and adequate manner.
    3. The accounting practices and
    CONVENTION methods should remain consistent
    OF from one accounting period to
    CONSISTENCY another.

    This consistency in accounting


    practices, policies and methods
    enables the management to
    compare the results of one year
    with those of other year or results
    of one department with those of
    other department.
    FOR EXAMPLE

    Year 2009-10 2010-11 2011-12


    Method of • Straight • Written • Units of
    Depreciation Line Down Measure
    followed
    Method Value Method
    Method
    4.CONVENTIO
    N OF According to this convention,
    MATERIALITY
    only material facts (significant
    & relevant ), which have
    significant economic effect on
    the business should be shown in
    the financial statements and no
    need to record immaterial and
    insignificant items in financial
    statements
    5. CONVENTION • According to this convention
    OF ACCURACY accountants should provide
    accurate and correct information
    with honesty. If the accounting
    information are not accurate and
    correct they will lose their
    reliability and it will also affect
    the reputation of the concern
    adversely.
    ACCOUNTING
    ASSUMPTIONS
    • These are certain statements or
    prepositions which are accepted as true
    without proof or argument.These are
    known as postulates or assumptions.
    1.PRICE STABILITY POSTULATE:

    This postulate relates to the value of money. It


    is assumed that value of money or its
    purchasing power remain unchanged year to
    year .It means that accountants make
    accounting records without keeping in mind the
    changes in the purchasing power.
    EXAMPLE:

    • A machine is purchased in a business for Rs 2,00,000 in


    the year 2015.It will be shown in the books at Rs 2,00,000
    and depreciation will be charged on this very value. It is
    possible now as a result of increase in price level, the
    value of machine may increase to Rs 10,00,000 in 2020.
    But accountants assuming the price level to be constant,
    will continue to show the machine in books at Rs 200,000
    ( and not at Rs 10,00,000)
    2.Continuity Postulate orAssumption:-
    This point has already discussed under ‘Going Concern Concept’
    3. Consistency Postulate or Assumption:
    This point will be discussed in Convention of Consistency.
    ACCOUNTING EQUATION
    Assets = Liabilities + Owner’s Equity
    The financial position of a company is measured by the following items:

    1. Assets (what it owns)


    2. Liabilities (what it owes to others)
    3. Owner’s Equity (the difference between assets and liabilities)

    The accounting equation (or basic accounting equation) offers us a simple way to
    understand how these three amounts relate to each other. The accounting equation for a
    sole proprietorship is:

    Assets = Liabilities + Owner’s Equity

    Assets Liabilities Owners


    Equity
    ACCOUNTING EQUATION

    An accounting equation is the statement of equality


    between resources and the sources which finance these
    the resources

    Resource = Sources of finances


    ASSETS

    RESOURCES OWNED BY A BUSINESS .


    Here are some types of assets that might be
    owned by a business company:
    Cash Notes
    Accounts
    Receivable Receivable

    Vehicle ASSETS Land


    s
    Store Buildings
    Supplies
    Equipment
    4
    * LAN
    D
    *Computer
    *Vehicle
    *Cash

    *
    Decrease Assets Increase Assets
    Purchasing Supplies (The asset account Purchasing Supplies (The asset account
    Cash decreases) Supplies increases)
    Owner Draws Owner Contributions
    Repaying bank loans Receiving bank loans
    Credit purchases
    LIABILITIES
    CREDITOR’S CLAIMS ON ASSETS.
    • Creditors are the people or companies to whom a business
    owes something (like money).
    • Here are some types of liabilities that a company might
    owe:
    Accounts Notes
    Payabl
    Payable e
    LIABILITIES

    Taxes Wages
    Payabl Payabl
    e e
    9
    OWNER EQUITY

    • Owner’s Equity is defined as the residual interest in the


    assets of the entity after the deduction of its liabilities.

    The value of all the assets after deducting the value of


    assets needed to pay liabilities.

    It is the value of the assets that the owner really owns.


    OWNER’S EQUITY = ASSETS - LIABILITIES
    SHAREHOLDER’S EQUITY

    •In the case of a corporation,


    which is publicly owned,
    equity is labeled
    shareholder’s equity
    Beginning Capital Net Income*
    PLUS - Withdraws
    Additional + Revenues
    Investment -- Expenses -

    If expenses are greater than revenues, then a


    net loss would result. This loss would be
    subtracted from capital because it would be a
    negative number.
    Decrease Owner’s Equity Increase Owner’s Equity

    Expenses Revenues

    Losses Gains

    Owner withdraws Owner investments

    Beginning Capital
    .,

    Assets = Liability + Owner’s Equity


    EXAMPLES
    1.
    Kapil started a business with cash Rs 300000 and furniture Rs 50000
    (Capital to the liability of business towards owner up to the extent of total
    investment will increase)
    Asset = liability +capital
    Cash +furniture = 0 + capital
    300000+50000 = 0+ 350000

    2. Purchased goods worth Rs 50000 for cash


    Cash+furniture +goods = liabilities+capital
    (300000-50000)+50000+50000 = 0+350000
    3. Furniture purchased worth 2000
    Cash+furniture+goods = liabilities +capital
    (250000 – 2000)+50000+2000+50000 = 0 +350000

    4.Purchased goods on credit worth Rs7000


    Cash+ furniture +goods = liabilities + capital
    248000+52000+50000+7000=7000+350000
    5.Goods worth Rs. 15000 were sold for Rs. 20000 way of payment
    was received in cash and half of goods were sold on credit

    Goods less by 15000


    Profit Rs 5000
    Cash more by 10000
    Debtors increase by 10000
    Cash +furniture +goods +debtors =liabilities + capital
    (248000+10000)+52000+(57000-15000)+10000
    =7000+350000+5000
    PRACTICAL EXERCISE

    • PLEASE CLICK HERE

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