Question

Question 01. Elucidate upon the various Accounting Concepts and Conventions.

Question 02. Discuss in brief the various qualitative characteristics of the financial statements.

Question 03. Explain Accounting Equation. Discuss also the concept of extended accounting equation.

Question 04. Define Accounting. What are the various functions performed by accounting explain with suitable examples?

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Note: Plagiarism is strictly prohibited please do not copy from internet

Answer 1

1) Accounting Concepts :

• Entity Concept: According to this concept business is treated as a separate unit and different from its owner
• Dual Aspect Concept: Based on this concept every transaction has two sides at least. If one account is debited, any other account must be credited.
• Going Concern Concept: This concept assumes that the business will continue to exist for long term(usually it's based on the financial year)

• Accounting Period Concept: According to this concept the entire life of the concern is divided into time intervals for the measurement of profit at frequent intervals
• Matching Concept: In determining the net profit from business operations all cost which is applied to revenue of the period should be charged against that.
• Accrual Concept: This concept helps in relating the expenses to revenue for a given accounting.
• Realization Concept: According to this concept, revenue is recognized when the sale is made and sale is considered to be made when a goods pass on to the buyer and he becomes legally liable to pay for it.
• Verifiable objectivity Concept: This concept means that all accounting transactions that are recorded in the books of accounts should be evidenced and supported by business.

Accounting Conventions:

• Convention of Disclosure: According to this convention accounting reports should disclose fully and fairly the information they are meant to represent.
• Convention of Materiality: The accountant should attach importance to material details and ignore nonmaterial aspects
• Convention of Consistency: This convention describes that accounting principles and methods should remain consistent in order to enable the management to compare the results.
• Convention of Conservatism: According to this convention, in the books of accounts all anticipated losses should be recorded and all anticipated gains should not be.

2) Qualitative characteristics of financial statements

a) Understandability

The financial statements are published to address the shareholders of the company. So it is important that these statements must be prepared in such a way that it is easy to understand and interpret for the shareholders. The information provided in these statements must be clear and understandable. For understandability, the management must consider not only the statutory data and information but also the voluntary information disclosures which would make financial statements easier to understand. The directors must elaborate on the information provided in the statements where necessary.

b) Relevance

The information provided in the financial statements must be relevant to the requirements of its users. Although the main recipients of these statements are shareholders, there are many other stakeholders that rely on these statements during their decision making process e.g. Institutional investors, potential investors, suppliers (for the assessment of credit rating) etc. So the information provided in these financial statements must be relevant to the information needs of all these stakeholders, which could affect their economic decisions.

c) Reliability:

The information provided in the financial statements must be reliable and true. The information derived to prepare these financial statements must be from reliable sources. The financial statements must indicate the true and fair picture of the status of the company. This means that the information provided must not have any significant errors or material misstatements. The transactions shown must be based on the concepts of prudence and must represent the true essence of the company’s transactions and operations.

d) Comparability:

The financial statements must be prepared in such a way that they are comparable with prior year financial statements. This characteristic of financial statements is very important to maintain, as it makes sure that the performance of the company could be monitored and compared. This characteristic is maintained by adopting accounting policies and standards that are applied are consistent from period to period and between different jurisdictions. This enables the users of the financial statements to understand and plot trends and patterns in the data provided, which makes their decision making easier.

3) The accounting equation is the formula used to depict the effect of the relationship of financial activities within a business and is a simplified breakdown of the values entered in the balance sheet. It shows that every asset owned by the company is equal to the claims (liabilities and equity) against the asset.

Assets= Liabilities+equity

The accounting equation is further extended mainly through the equity point of view. The equity is split into the owner’s capital, owner’s withdrawal, revenue, and expenses. The basic reason behind expanding the equation is to distinguish between the increase in equity due to economic events, i.e. capital contributions by owners or shareholders, and the profit retained from the previous operations of the company.

Assets= Liabilities+Owner's capital+Revenue-Expense-Drawings

4) Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions. In essence, accounting is the process of systematically recording, measuring, and communicating information about financial transactions.

Basic functions of accounting

• identification
• recording
• classification
• summarization
• ascertainment of results
• Finding the financial position of an organization
• communication of information derived from understanding.
• analysis of the interested parties including the management.

Management functions of accounting

Budget preparation

Planning and financial policy regulation

Cost control

Auditing