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Paper 1 Principles and Practices of Accounting Theoretical Framework 1.13
Table 1.2 Accounting Concepts, Principles and Conventions
Accounting Concepts Accounting Principles Accounting Conventions
Concepts – Idea or Accounting principles are a Emerge out of account-
notion which has uni- body of doctrines commonly ing practices adopted
versal application. associated with the theory by the organisations
Basic conditions and and procedures of account- over time.
assumptions, which ing serving as an explanation To improve the quality
form the basis upon of current practices and as of accounting informa-
which the accoun- a guide for selection of con- tion, accountancy bodies
tancy has been laid. ventions or procedures where of the world may change
alternatives exist.
Accounting concepts any of the conventions.
lays foundation upon Accounting principles should be:
which the accounting ○ Consistently followed.
principles are formu- ○ Based on real assumptions.
lated.
○ Able to reflect future pre-
dictions.
○ Simple, explanatory and
understandable.
○ Informational for the users.
Now let us see the various accounting concepts on which accounting is based.
1.12.1 Entity Concept
Entity concept states that business is a “separate identity apart from its owner”. Own-
er’s transactions are recorded separately in his personal books and business transactions
in business books of accounts. It helps to keep business affairs free from the influence
of the personal affairs of the owner.
Entity concept states that the organisation is liable to the owner for the capital in-
vested by the owner. The owner has claim on the profit of the organisation since they
have invested capital.
POINT TO REMEMBER
In case of corporate entities, the portion of profit apportioned to the
owner becomes current liabilities in case it is immediately payable.
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