What Does 2-For-1 Stock Split During The Current Year Mean Accounting Conventions and Accounting Concepts

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Accounting Conventions and Accounting Concepts

(1) Actuality

The relevance convention emphasizes the fact that only such information should be available to the accountant that is relevant and useful to the achievement of its objectives. For example, the business is interested in what are the total labor costs? He is not interested in knowing how much employees spend and what they save.

(2) Objectivity

The objectivity convention emphasizes that accounting information should be measured and expressed according to standards that are generally accepted. For example, inventories of goods lying unsold at the end of the year should be valued at cost rather than at a higher price, even though they are likely to be sold at a higher price in the future. The reason is that no one can be sure of the price that will prevail in the future.

(3) Expediency

The expediency convention emphasizes that the time, effort, and cost of analyzing accounting information must be weighed against the benefits that result. For example, the cost of “lubricating and lubricating” machines is so small that its breakdown by unit produced would be meaningless and would lead to a loss of work and time of the accounting staff.

Accounting concepts

(1) Materiality

It refers to the relative importance of an item or event. Accounting decision makers are constantly faced with the need to make judgments about materiality. Is this element large enough for information users to influence? The essence of the concept of materiality is this: an omission or misrepresentation of an item is material if, in light of the surrounding circumstances, the magnitude of the item is such that the opinion of a reasonable person relying on the report would be probable. has been modified or affected by the inclusion or correction of the element.

(2) Accounting period

Although the accounting practice believes in the concept of a going concern ie. the life of a business is indefinite, but it must still report on the results of its activities for a certain period (usually one year). Thus, accounting attempts to present the profit or loss earned or incurred by the business during the period under review. This is usually a calendar year (January 1 to December 31), but in other cases it can be a fiscal year (April 1 to March 31) or any other period depending on business convenience or business practice in the country concerned.

In connection with this concept, it is necessary to take into account during the accounting period all items of income and expenses on the date of the accounting year. The problem with this concept is that it is necessary to properly allocate capital and expenditure to income. Otherwise, it will affect the results shown in the financial statements.

(3) Implementation

This concept emphasizes that profits should only be considered when they are realized. The question is, at what stage should the accrual of profit be considered? Either at the time the order is received, or at the time the order is fulfilled, or at the time the cash is received. To answer this question, accounting follows the legislation (Sale of Goods Act) and recognizes the principle of the law ie. revenue is generated only when goods are transferred. This means that profit is considered accrued when “ownership of the goods passes to the buyer”, i.e. if sales are affected.

(4) Juxtaposition

Although a business is a going concern, its continuity is artificially broken into several accounting years to determine periodic results. This profit is a measure of the economic efficiency of the concern and thus increases the owner’s capital. Since profit is the excess of income over expenses, it is necessary to combine all income and expenses relating to the period under consideration. The concepts of implementation and accrual essentially stem from the need to match expenses with revenues received during the reporting period. Income and expenses shown on the income statement must relate to the same goods transferred or services rendered during the accounting period. The matching concept requires that expenses be matched with revenues of the corresponding accounting period. Therefore, we need to determine the revenue generated in a particular accounting period and the expenses incurred to generate that revenue.

(5) Subject

According to this concept, the task of measuring income and wealth is accomplished by accounting for an identifiable unit or entity: a unit or entity so identified is treated differently and distinct from its owners or members. In law, the distinction between owners and businesses is made only in the case of joint-stock companies, but in accounting, this distinction is also made in the case of sole proprietors and partnerships. For example, goods used from the company’s stock for commercial purposes are treated as business expenses, while similar goods used by the owner, ie. by the owner for personal use, are considered as his drawings. This distinction between the owner and the business unit helped accounting to report profitability more objectively and fairly. It also led to the development of “responsibility accounting”, which allows us to ascertain the profitability of even the various divisions of the core business.

(6) A stable monetary unit

Accounting assumes that the purchasing power of a monetary unit, say the rupee, remains constant throughout time. For example, the intrinsic value of one rupee is the same and equal in 1800 and 2000, thus ignoring the effect of a rise or fall in the purchasing power of a monetary unit due to deflation or inflation. Although the assumption is unrealistic and the practice of ignoring changes in the value of money is now highly questionable, options for including changes in the value of money in accounting have been proposed, namely the current purchasing power (CPP) method. ) and the current cost accounting (CCA) method are under evolution. Therefore, we have to be content with the concept of a “stable monetary unit” for now.

(7) Price

This concept is closely related to the concept of a going concern. Accordingly, an asset is usually recorded in the books at the price at which it was acquired, i.e. at cost. This “cost” serves as the basis for accounting for that asset in the next period. This “cost” should not be confused with “value”.

It must be remembered that the actual value of assets changes from time to time, this does not mean that the value of such assets is wrongly recorded in the books. The recorded book value of assets does not reflect their true value. They do not mean that the values ​​marked on them are the values ​​for which they can be sold. Although assets are recorded in the books at cost, over time their value is reduced by depreciation. In certain cases, only assets such as ‘goodwill’, if paid, will appear in the books at cost, and if nothing is paid, they will not, even though the asset exists on the name and goodwill created by the concern.

Therefore, the values ​​of assets in the balance sheet and net income shown in the income statement cannot be said to reflect the correct assessment of the financial position of the enterprise because they have no relation to the market. the value of the assets or their replacement value. The idea that transactions should be recorded at cost rather than at a subjective or arbitrary value is known as the cost concept. Over time, the market value of fixed assets such as land and buildings is significantly different from their cost.

These changes or variations in value are usually ignored by accountants and they continue to value them on the balance sheet at historical cost. The principle of valuing fixed assets at cost rather than market value is a basic principle in the costing concept. According to them, only current values ​​will fairly reflect the costs to the organization.

The cost principle is based on the principle of objectivity. Proponents of this method argue that as long as users of financial statements trust the reporting, there is no need to change the method.

(8) Conservatism

This concept emphasizes that profits should never be overestimated or expected. Traditionally, accounting follows the rule of “predict the lack of profit and take into account all possible losses”. For example, ending inventory is valued at cost or market, whichever is lower. The effect of the above is that if the market price falls, then anticipate the “expected losses”, but if the market price rises, ignore the “expected gains”.

Critics point out that overconservation will lead to the creation of a secret reserve. This would be completely against the disclosure doctrine. However, conservatism may reasonably be uncriticized.

Accounting equation

The dual concept can be formulated as “for every debit there is a credit”. Each transaction must have a bilateral effect of the same amount. This concept led to the accounting equation, which states that at any point in time, the assets of any entity must equal (in monetary terms) the total of its equity and liabilities. This can be expressed as an equation:

AL = P

where

A means assets of the organization;

L stands for liabilities (requirements of third parties) of the organization; and

P stands for the owner’s claim (equity) to the organization.

(The form of representation of the equation AL = P corresponds to the legal interpretation of the financial position. Thus, it is emphasized that, strictly speaking, the property claim is the remainder after securing the claims of third parties to the business from the total assets of the business).

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