Course Content
Accounting Principles and Standards, Preparation of Financial Statements
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Accounting Concepts and Principles: Theoretical Framework
Accounting Standards : IFRS, IAS & GAAP
Responsibilities of IASB
Indian Accounting Standards (Ind AS)
Types of Account
Types of Expenditure
Financial Statement Analysis: Ratio Analysis, Funds Flow and Cash Flow Analysis, DuPont Analysis
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Financial Statements List
Important Terms
Ratio Analysis
Funds Flow Analysis
Flow of Funds
Cash Flow Analysis
Ind AS 7: Cash Flow Statement
DuPont Analysis
Preparation of Cost Sheet, Marginal Costing, Cost-Volume Profit Analysis
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Important Principles in Cost Accounting
Implicit Cost & Explicit Cost; Accounting Profit & Economic Profit
Law of Diminishing Returns
Economic Theory of Production
Production Theory in Micro Economics
Special Types of Costs
Cost Theory in Economics
Short-Run Costs in Perfect Competition
Marginal Revenue & Profit Maximizing Rule
Shutdown Rule in Short Run
Short Run in Monopoly
Preparation of Cost Sheet
Fixed Costs (F.C.) , Variables Costs ( V.C.) and Contribution Margin
P/V ratio ( Profit / Volume ratio)
Break Even Point (B.E.P.) & Margin of Safety (M.O.S.) & Law of Diminishing Return
Cost-Volume Profit Analysis
Standard Costing & Variance Analysis
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Inventory Valuation Method
Standard Costing
Material Variance
Volume Variance
Overhead Absorption Rate
Overhead Expenditure Variance
Variable Overhead Cost Variance
Overhead Spending Variance
Labour Efficiency Variance
Unit IV: Managerial Accounting

Accounting Concepts and Principles: Theoretical Framework

In accounting, certain concepts and principles guide the preparation and presentation of financial statements. These principles form the foundation of how businesses report their financial performance and position. The correct application of these concepts ensures consistency, transparency, and reliability in financial reporting, helping users make informed decisions. Below is a detailed explanation of these principles, listed in their correct sequence according to their precedence.

1. Separate Entity Concept (Business Entity Concept)

  • Assumes that the business is separate from its owners and should be treated as an independent entity in its financial reporting.

2. Going Concern Concept

  • Assumes that the business will continue to operate indefinitely, unless there is evidence to the contrary. This affects the valuation of assets and liabilities.

3. Accrual Concept

  • Recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash transactions occur. This ensures financial statements reflect a company’s performance over time.

4. Consistency Concept

  • Requires that the same accounting methods be applied consistently from one period to another. Changes in accounting methods should be disclosed, and the reason for the change should be provided.

5. Conservatism (Prudence) Concept

  • Suggests that expenses and liabilities should be recognized as soon as they are anticipated, but revenues should only be recognized when they are assured. It prevents overstatement of financial position.

6. Matching Concept

  • Requires that expenses be matched with the revenues they help to generate in the same period. This principle ensures accurate reflection of profitability.

7. Money Measurement Concept

  • States that only those transactions and events that can be measured in monetary terms should be included in the financial statements. Non-monetary factors like employee morale or market conditions are excluded.

8. Full Disclosure Concept

  • Requires that all relevant financial information be disclosed in the financial statements or accompanying notes. This ensures transparency and allows stakeholders to make informed decisions.

9. Historical Cost Concept

  • States that assets should be recorded at their original purchase cost, rather than their current market value, unless stated otherwise (e.g., under specific accounting standards like IFRS or Ind AS).

10. Realization Concept

  • Recognizes revenue only when it is earned, not when cash is received. It is often used in the context of the Revenue Recognition Principle.

11. Dual Aspect Concept

  • States that every transaction affects at least two accounts in the financial statements, ensuring the accounting equation (Assets = Liabilities + Equity) remains balanced.

12. Objectivity Concept

  • Requires that financial information is based on objective evidence, such as invoices, receipts, or contracts. This ensures that the financial statements are not influenced by personal bias.

13. Materiality Concept

  • States that financial information is material if its omission or misstatement could influence the decision-making of users of financial statements. Small errors that do not impact decision-making may be ignored.

14. Accounting Time Period Concept

  • Assumes that the activities of a business can be divided into time periods (e.g., months, quarters, years) for reporting purposes, regardless of whether the business’s activities are continuous.

15. Entity Concept

  • This is similar to the separate entity concept and focuses on treating a company’s finances independently from the personal finances of its owners or shareholders.

16. Substance Over Form Concept

  • States that transactions should be recorded based on their economic substance rather than their legal form. This ensures the financial statements reflect the true nature of transactions.

Conclusion

These accounting concepts form the backbone of accounting practice and guide the preparation and presentation of financial statements. They ensure that financial reporting is consistent, transparent, and reliable, helping stakeholders (such as investors, creditors, and management) make informed decisions based on accurate and standardized information.

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