Question

Basic Concepts and Conventions according to GAAP include the Entity Concept, the Reliability Concept, the Going Concern Convention, the Materiality Convention, the Cost Benefit Criterion, and the Stable monetary unit Concept. Briefly describe or define two of these concepts in terms of how financial statements are prepared or used.

Answer 1

BASIC ACCOUNTING CONCEPTS AND CONVENTIONS :

GAAP are the set of principles,conventions and concepts that are applicable,followed and used in accounting everywhere irrespective of state or country. these are the generally accepted accounting principles by all accountants and CA's everywhere.

ACCOUNTING CONCEPTS :

1.seperate entity concept

2.going concern concept

3.monetary unit concept   

4.cost concept

5.dual aspect concept

6.accounting period concept

7.matching concept

8.realisation concept

9.reliability/objective evidence concept

10.accural concept

ACCOUNTING CONVENTIONS :

1.consistency

2.full disclosure

3.materiality

4.prudence

BUSINESS ENTITY COCEPT :

seperate entity concept or business entity concept or economic entity concept states that business and owner are seperate individual units and canot be combined together.the transactions relating to the business should be rfecorded seperately for the owner and any other business.It implies that the recording of accounts should take into account only the events that are related to a particular business and the all other events irrelevant to the business should not be included into the accounting records.The business entity concept is of grate importance in accounting because if all the transactions are messed up or mixed ,the accounting records will lose their usability.this concept is applicable for all types of businesses that may be sole proprietorship or partnership.

The seperate entity concept helps to measure the performance of a particular business in terms profitabilirty and while preparing financial statements,it helps in assessing the financial posetion of a business seperately and alsom ensures that each and evr entity is taxed seperately.

RELIABILITY CONCEPT :

Also known as objective evidence concept , states that while recording accounts the events or the transactions only with proofs are to be recorded i.e recording those transactions which we can verify with objective evidences like receipts or bills ,bank statements or promissory notes.this concept is very helpfull and makes the accounting information reliable,however this concept is difficult to meet in some particular events like recording a reserve,such as sales returns reserve or obsolescence reserve.

while preparing financial statements application of the objective concept makes the accounting measurements indipendently verifiable and evidenced.the objective evidences forms the basis for recording entries in the books of accounts and further verifications by auditors .