...Contract costing is an extension of job costing method, whereby the job to be carried out is not a small job of printing cards, fabricating machines etc., but the job involved is a big job to construct building etc., under a contract. In the history of costing, when contract costing was introduced as a method of costing, financial accounting already had a system of accounting for construction contracts. The same system was adopted under cost accounting as well. This is the reason why contract costing has more linkage with financial accounting concepts. The parties involved under a construction contract: 1. Contractor, who undertakes to construct any building etc. 2. Contractee, the person for whom the construction is carried out. The objective is to ascertain on year to year basis, profit from each contract in the financial statements of the contractor. This is done by preparing a Contract A/c in the books of contractor. The nature of Contract A/c is that of final accounts that reveal profit or loss as a result. There are following situations that may arise for any construction contracts: 1. The contract begins as well as ends in the same year (Completed contract). 2. Contracts for which construction begins during the year but does not complete by the year end (Incomplete contract). 3. Contracts for which construction was incomplete at the beginning of the year and remains incomplete till the end of the year. 4. Contracts for which construction was incomplete...
Words: 3206 - Pages: 13
...money Conclusions Accounting Concepts and Conventions Introduction Accounting concepts and conventions as used in accountancy are the rules and guidelines by that the accountant lives. All formal accounting statements should be created, preserved and presented according to the concepts and conventions that follow. In the United Kingdom, four of the following accounting concepts are laid down in Statement of Standard Accounting Practice number 2 (SSAP 2: Disclosure of Accounting Policies), they are the * Going concern concept * Accruals or matching concept * Consistency concept * Prudence concept Going concern This concept is the underlying assumption that any accountant makes when he prepares a set of accounts. That the business under consideration will remain in existence for the foreseeable future. In addition to being an old concept of accounting, it is now, for example, part of UK statute law: reference to it can be found in the Companies Act 1985. Without this concept, accounts would have to be drawn up on the 'winding up' basis. That is, on what the business is likely to be worth if it is sold piecemeal at the date of the accounts. The winding up value would almost certainly be different from the going concern value shown. Such circumstances as the state of the market and the availability of finance are important considerations here. Accruals Otherwise known as the matching principle. The purpose of this concept is to make sure that...
Words: 1931 - Pages: 8
...Accounting Concepts i. Accounting/Business entity The business is an entity (or body) separate from its owner. Entity means a distinctive existence. ii. Consistency The accounting treatment applied to an item should be the same for all accounting periods, unless there is a valid reason for change and the effect of such changes are disclosed. This is to enable meaningful comparisons between two or more accounting periods to be made. iii. Accounting period Assuming that the business is a going concern, the life span of a business entity is divided into fixed periods of time to enable financial reports to be prepared for that particular period. iv. Accrual concept Revenue is recognized when earned and expenses when incurred. Revenue received (or expenses paid) but not yet earned (incurred) cannot be recognized. v. Duality concept This is the concept at the heart of the system in accounting known as “double entry system” (see Chapter 3). It relies on the fact that each transaction represents an exchange of resources, and hence there will be two equal and opposite aspects to each accounting record. vi. Going concern concept It is assumed that the business will continue to operate for an indefinite period of time. Thus, assets are valued at historical cost rather than market or saleable value. vii. Historical cost concept All business transactions are recorded at the cost at the time it took place. viii. Matching principle ...
Words: 363 - Pages: 2
...| Accounting Concepts | Adhered / Violated | 1. A sole proprietor has sold his private yacht, but it has not recorded anything about it on the business record. | Objectivity | Adhered | 2. An equipment has been bought from a supplier at a huge trade discount, and this has been entered in the books at the figure even though it is worth more on the market. | Objectivity + Cost | Adhered | 3. Carissa Ng, the owner of Dress-up boutique, sold some dresses for S$250 on 10th Aug 2012. However she only received the money on the 19th Aug 2012. Hence she recorded the sale on 19th Aug 2012 | Objectivity | Adhered | 4. A receipt was issued by the business after receiving the money for goods sold. | Objectivity | Adhered | 5. Helena has been the proprietor of Home’s Laundry Services for a number of years. Recently, the business has been struggling and she is uncertain as to whether she will continue her business next years. She has decided to base on what she expects to receive if she decides to sell the firm’s assets | Going Concern | Violated | 6. Raja Vatsan does not think it is necessary to prepare a profit and loss statement and balance sheet every year. He has been in business operating under the same name Raj Vat Shop for five years now and has just completed the financial reports for the three year period to show a profit of $70,000 | | | 7. The purchase of some hole punchers and staplers was recorded as fixed assets | Materiality | Violated | ...
Words: 399 - Pages: 2
...Accounting Concepts MODULE - 1 Basic Accounting 2 ACCOUNTING CONCEPTS In the previous lesson, you have studied the meaning and nature of business transactions and objectives of financial accounting. In order to maintain uniformity and consistency in preparing and maintaining books of accounts, certain rules or principles have been evolved. These rules/principles are classified as concepts and conventions. These are foundations of preparing and maintaining accounting records. In this lesson we shall learn about various accounting concepts, their meaning and significance. Notes OBJECTIVES After studying this lesson, you will be able to : explain the term accounting concept; explain the meaning and significance of various accounting concepts : Business Entity, Money Measurement, Going Concern, Accounting Period, Cost Concept, Duality Aspect concept, Realisation Concept, Accrual Concept and Matching Concept. 2.1 MEANING AND BUSINESS ENTITY CONCEPT Let us take an example. In India there is a basic rule to be followed by everyone that one should walk or drive on his/her left hand side of the road. It helps in the smooth flow of traffic. Similarly, there are certain rules that an accountant should follow while recording business transactions and preparing accounts. These may be termed as accounting concept. Thus, this can be said that : Accounting concept refers to the basic assumptions and rules and principles which work as the basis of recording of business transactions...
Words: 4787 - Pages: 20
...Question 1 Explain using various examples,how the major accounting concepts are used in preparing financial statements. Accounting is the language of business and it is used to communicate finance information. In order for that information to make sense, accounting is based on 11 major concepts significantly. These fundamental concepts then form the basic for all of the Generally Accepted Accounting Principles (GAAP). And these are the major concepts: 1. Historical Cost Concept 2. Prudence Concept 3. Economy Entity Concept 4. Money Measurement Concept 5. Time Period Concept 6. Going Concern Concept 7. Dual Aspect Concept 8. Revenue Recognition Concept 9. Matching Concept 10. Consistency Concept 11. Materially Concept In light of these concepts, the three key financial statements namely Balance Sheet, Profit and Loss and Cash Flow statements are analyzed. 1.Historical Cost Concept : A principle which states that companies should record assets at their cost is called Historical Cost Concept. Most assets held on the balance sheet are to be recorded at their historical cost even if they have changed significantly in value over time. Historical cost is the value of a resource given up or a liability incurred to acquire an asset/service at the time when the resource was given up or the liability incurred. The concept of historical cost is important because market values change so often that allowing...
Words: 1874 - Pages: 8
...8.0 Explanation and meaning of the following concepts and conversion 8.1 ENTITY CONCEPT Entity concept is an accounting principle which refers to a business or organisation as separate and distinct entity in its own right, meaning that any business transaction associated with the business should be recorded separately from the transaction of its investors, they are two separately identifiable parties. It simply means that accounting records and reports are concerned with the business entity, not with the people associated with the business. 8.2 MATCHING CONCEPT The matching concept refers to the accounting principle used to record and categorize the expenses of a business and then associating it with revenue earned by the organisation in the same accounting period as each other. The expenses for that period constitute the costs of the assets used by a business to acquire revenue which is documented for that accounting period. 8.3 HISTORIC COST CONCEPT Historic cost concept refers to the accounting theory of the cost of value of assets carried in the financial position statement and reflecting the cost of the item at the time it was purchased, rather than its current value. The present price is generally described in various ways, such as current replacement price or current realisable worth; it is argued that recording of resources at the present price would help to give a better perception view of the financial positional statement. For example, if a trader acquired...
Words: 444 - Pages: 2
...use. Conversely, liabilities of an entity should not be presented below the amount that is likely to be paid in its respect in the future. There is an inherent risk that assets and income of an entity are more likely to be overstated than understated by the management whereas liabilities and expenses are more likely to be understated. The risk arises from the fact that companies often benefit from better reported profitability and lower gearing in the form of cheaper source of finance and higher share price. There is a risk that leverage offered in the choice of accounting policies and estimates may result in bias in the preparation of the financial statements aimed at improving profitability and financial position through the use of creative accounting techniques. Prudence concept helps to ensure that such bias is countered by requiring the exercise of caution in arriving at estimates and the adoption of accounting policies. Example: Inventory is recorded at the lower of cost or net realizable value (NRV) rather than the expected selling price. This ensures profit on the sale of inventory is only realized when the actual sale takes place. However, prudence does not require management to deliberately overstate its liabilities and expenses or understate its assets and income. The application of prudence should...
Words: 1824 - Pages: 8
...MANAGERIAL ACCOUNTING Based on Management Accounting by Robert N. Anthony Nearly every business enterprise has an accounting system, that is, a means of collecting, summarizing, analyzing, and reporting, in monetary terms, information about the business. In studying these systems, it is useful to consider them as consisting of two parts that are labeled financial accounting and managerial accounting, although in practice the two are not neatly separated. Financial accounting has the primary objective of providing financial information to parties outside the business — stockholders, bankers, other creditors, and government agencies. The techniques, rules, and conventions according to which financial accounting figures are collected and reported reflect, to a considerable extent, the requirements of these outside parties. Managerial accounting is concerned with accounting information that is useful to management. Although much of this information is the same as that contained in reports for outsiders, management also needs a considerable amount of addi-tional information. “Useful” always connotes some purpose for which the figures are to be used. The concern is with the use of accounting figures in the identification, recognition, or solution of management problems. The terms “financial accounting” and “managerial accounting” are not precise descriptions of the activities they comprise. All accounting is financial in the sense that all accounting systems are...
Words: 1700 - Pages: 7
...Basic Accounting Concepts Vai Ma’ake University of Idaho Financial Accounting ACCP/537 March 19, 2011 Introduction To identify and describe the sources of generally accepted accounting principles (GAAP). Also identify the source hierarchy and explain why the hierarchy is important. Describe effective accounting information using the qualities of accounting information and how an accrual basis of accounting system is different from a cash basis of accounting. Finally, describing the different types of business structures and the defining features of each structure (University of Phoenix Syllabus, 2011). Basic accounting concepts In successfully running and operating a business, business structure and basic accounting concepts must be present to operate well. The generally accepted accounting principles also known as the (GAAP) set standards to the financial statements. The standards set by the GAAP must also include effective accounting information. Companies do have the option either to use accrual basis of accounting or cash basis of accounting. However, under the GAAP it does accept cash basis accounting. Companies will determine the type of business to do business in. However, these decisions do makes the difference in how successful a company is. [pic]GAAP The GAAP are standards, which are universally practiced and generally accepted in accounting. These standards and rules are for accountants to use in compiling...
Words: 767 - Pages: 4
...Basic Accounting Concepts The basic accounting concepts are referred to as the fundamental ideas or basic assumptions underlying the theory and practice of financial accounting and are broad working rules for all accounting activities and developed by the accounting profession. The important concepts have been listed as below: • Business entity; • Money measurement; • Going concern; • Accounting period; • Cost • Dual aspect (or Duality); • Revenue recognition (Realisation); • Matching; • Full disclosure; • Consistency; • Conservatism (Prudence); • Materiality; • Objectivity. 2.2.1 Business Entity Concept The concept of business entity assumes that business has a distinct and separate entity from its owners. It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities. Keeping this in view, when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner. Here, one separate entity (owner) is assumed to be giving money to another distinct entity (business unit). Similarly, when the owner withdraws any money from the business for his personal expenses(drawings), it is treated as reduction of the owner’s capital and consequently a reduction in the liabilities of the business. The accounting records are made in the book of accounts from the point of view of the business unit and not that of the owner. The personal assets and Theory base of Accounting25 ...
Words: 1190 - Pages: 5
...Basic Accounting Concepts and Business Structures David Lickem ACC/537 April 15, 2013 Basic Accounting Concepts and Business Structures The accounting profession as a whole is extremely complex and ripe with regulations and rules. It is also enormously important to any organization, big or small, and thus can be a very intimidating career choice. As with anything else though, reaching a destination requires a starting point, and in accounting, a good starting point is to understand basic accounting concepts and business structures. These basic accounting concepts include but are not limited to the Generally Accepted Accounting Principles, the qualities of effective accounting information, and the differences between accrual based accounting and cash based accounting. The different types of business structure are also an important concept in understanding the basics of accounting. Generally Accepted Accounting Principles: Sources and Hierarchy The stock market crash of 1929, which led to the Great Depression, resulted in a demand for more government regulation in financial institutions and the stock market. The Securities and Exchange Commission (SEC) was established with the goal of developing and standardizing financial information presented to stockholders, and since then the SEC has worked alongside several private organizations to develop the Generally Accepted Accounting Principles (GAAP) Sources of GAAP The American Institute of Certified Public Accountants...
Words: 1165 - Pages: 5
...Basic Accounting Concepts and Business Structures Karen Miersma ACC/537 July 14, 2012 Professor James Neuner Basic Accounting Concepts and Business Structures One of the first things looked at when studying accounting concepts and business structures is GAAP (generally accepted accounting principles). There is a hierarchy that accountants use when exploring “substantial authoritative support” (Kieso, Weygandt, & Warfield, 2007, Chapter 1, Financial Accounting and Accounting Standards) in their accounting practices. This hierarchy provides the framework needed to prepare company financial statements. This hierarchy is very important because it is the company’s responsibility to select the accounting principles for their financial statements and the company needs to be in compliance with GAAP. Hierarchy Here are four main categories in this hierarchy. The first is the most authoritative, etc. 1. FASB Standards; APB Opinions; AICPA Research Bulletins. 2. FASB Bulletins; AICPA Accounting and Audit Guides; AICPA Statements. 3. FASB Emerging Issues Task Force; AICPA AcSEC Bulletins. 4. AICPA Interpretations; FASB Implementations; Widely Recognized and Prevalent Industry Practices1. Descriptions The federal government established the SEC (Securities and Exchange Commission) to help regulate, standardize, and develop the financial information the stockholders receive (Kieso, Weygandt, & Warfield, Chapter 1, Financial Accounting and Accounting Standards, 2007). The...
Words: 1032 - Pages: 5
...Table of Contents 1.1 Accounting Concepts Definition............................................................................................... 2 1.1.1 Business Entity Concept ........................................................................................................ 5 1.1.2 Money Measurement Concept ............................................................................................... 6 1.1.3 Going Concern Concept ......................................................................................................... 8 1.1.4 Accounting Cost Concept .................................................................................................... 10 1.1.5 Accounting Period Concept ................................................................................................. 11 1.1.6 Realization Concept ............................................................................................................. 12 1.1.7 Materiality Concept ............................................................................................................. 13 1.1.8 Accruals Concept ................................................................................................................. 14 1.1.9 Dual Aspect Concept ........................................................................................................... 15 1.1.10 Matching Concept .....................................................................................................
Words: 4930 - Pages: 20
...Basic Accounting Concepts and Business Structures Basic Accounting Concepts and Business Structures The accounting environment is constantly changing to improve so decision-making in the business world will thrive. To be successful in a business, understanding the fundamental concepts are essential to make informed decisions. The federal government formed the SEC to standardize financial information and to keep the financial environment regulated. In the following sections the basic concepts of accounting will be addressed along with the three business structures. Generally Accepted Accounting Principles The framework of guidelines on standards and rules for financial accounting are referred to as the generally accepted accounting principles (GAAP). The American Institute of Certified Public Accountants (AICPA) issued the hierarchy of generally accepted accounting principles as an auditing standard. It has four categories ranging from most authoritative, Category A to least authoritative, Category D. The major sources are FASB Standards, Interpretations, and Staff Positions, along with the ABP Opinions, and AICPA Accounting Research Bulletins. The hierarchy is important because there are times when these sources do not provide the guidance needed by companies. When a company is looking for guidance and there is conflicting information, the company should always refer to the pronouncements in the higher...
Words: 764 - Pages: 4
