Accounting Principles | Class 11 | Accountancy | Chapter 3 | Part 1

Summary

In this educational video, the instructor embarks on day 9 of the commerce pro series, aiming to complete the syllabus within 90 days. The focus is on chapter 3, 'Accounting Principles,' which will span two classes. The session delves into the foundational concepts of accounting, explaining the importance of principles as guidelines for decision-making and financial reporting. Key topics include the going concern assumption, consistency, and the accrual concept, setting a strong foundation for understanding accounting practices.

Takeaways

• 📚 The video is part of a commerce pro series aiming to cover the entire syllabus in 90 days, including subjects like accounts, business studies, and economics.
• 📈 The current session focuses on chapter 3, which is about accounting principles and is planned to be completed in two classes.
• 🏫 The instructor explains that accounting principles are fundamental rules and guidelines that help in decision-making and understanding the accounting process.
• 🌐 These principles are generally accepted worldwide, despite some variations from country to country, and are based on extensive study, analysis, and observation.
• 🔍 The principles are characterized by being uniform, man-made, flexible, and generally accepted, providing a solid foundation for solving accounting problems.
• 📝 The principles should be relevant, objective, and feasible, meaning they should be applicable, free from bias, and easy to use without complexity.
• 📑 The chapter discusses two types of accounting principles: accounting concepts or assumptions, and accounting conventions, which are based on professional experience and customs, respectively.
• 💡 Three fundamental accounting assumptions are introduced: going concern, consistency, and accrual concept, which are essential for the preparation of financial statements.
• 🏢 The going concern assumption implies that a business is expected to continue operating for the foreseeable future, which affects how assets and liabilities are accounted for.
• 🔄 The consistency principle requires that the same accounting methods be applied from one period to another to ensure comparability of financial statements.
• 💸 The accrual concept distinguishes between the cash basis and accrual basis of accounting, emphasizing the recording of transactions when they occur, not when cash is exchanged.

Q & A

What is the main focus of the video script?

The main focus of the video script is to introduce and explain accounting principles, specifically accounting concepts and assumptions, to students as part of a commerce pro series.

How many days does the instructor plan to cover the entire syllabus?

The instructor plans to cover the entire syllabus in 90 days, with the video being on day 9 of the series.

What is the significance of accounting principles according to the script?

Accounting principles are significant because they are a set of rules and guidelines that help in decision-making, understanding, and simplifying the process of accounting.

What does the term 'going concern' mean in the context of accounting?

The 'going concern' concept in accounting assumes that a business will continue to operate for the foreseeable future and won't be liquidated or significantly reduced in scale.

Why are accounting principles considered flexible?

Accounting principles are considered flexible because they can change over time as business practices, technology, and human behavior evolve.

What does the consistency concept require in accounting?

The consistency concept requires that once an accounting method or principle is adopted, it should be consistently applied from one accounting period to another.

What is the accrual concept and how does it differ from the cash basis?

The accrual concept requires that revenues and expenses are recorded when they are earned or incurred, not when cash is received or paid. This differs from the cash basis, which records transactions when cash is exchanged.

What are the three fundamental accounting assumptions discussed in the script?

The three fundamental accounting assumptions discussed in the script are going concern, consistency, and accrual concept.

Why is the 'full disclosure' convention important in accounting?

The 'full disclosure' convention is important in accounting because it ensures that all material information about a company's financial position is disclosed to users of financial statements.

What is the purpose of accounting principles according to the video script?

The purpose of accounting principles is to provide relevance, objectivity, and feasibility in the preparation and understanding of financial statements.

How are accounting principles developed?

Accounting principles are developed over a period of time through usage, experience, and statements from professional bodies, government agencies, and are generally accepted worldwide.

Outlines

00:00

📚 Introduction to Accounting Principles

The speaker welcomes the audience to the ninth session of the Commerce Pro series, emphasizing the goal to complete the entire syllabus within 90 days. The session focuses on the third chapter, 'Accounting Principles,' which will be covered in two classes. The first class is conceptual, discussing the basics and principles of accounting. The speaker explains that accounting principles are guidelines developed through study, analysis, and observation, which are accepted worldwide by accountants for preparing accounting statements. These principles are uniform, man-made, and flexible, adapting to changes in business practices and technology. The speaker also introduces the characteristics of accounting principles, such as relevance, objectivity, and feasibility, and encourages students to follow the playlist for comprehensive learning.

05:02

🔍 Accounting Concepts and Assumptions

The second paragraph delves into the types of accounting principles, specifically accounting concepts or assumptions and accounting conventions. The speaker clarifies that concepts and assumptions are fundamental and developed through professional experience and knowledge, while conventions are based on customs and beliefs with varying legal acceptability. The paragraph introduces three basic accounting assumptions: the going concern, consistency, and accrual concept. The going concern assumption implies that a business will continue operating indefinitely, allowing for the recognition of fixed assets and depreciation. The consistency concept mandates the use of uniform accounting methods from year to year for accurate financial analysis. The accrual concept distinguishes between cash and accrual accounting, emphasizing the recording of transactions based on when they are incurred, not when cash is exchanged.

10:06

💼 Detailed Explanation of Accounting Assumptions

This paragraph provides a detailed explanation of the three fundamental accounting assumptions. The going concern concept is further elaborated with examples, such as taking loans and purchasing assets, to illustrate the assumption that a business will operate for a long time. The consistency concept is emphasized as crucial for comparing financial statements over time, requiring the use of the same accounting methods annually. The accrual concept is contrasted with the cash basis of accounting, explaining that transactions should be recorded when they occur, regardless of cash flow, to provide a true and fair view of financial performance. The speaker instructs students to review these concepts and look forward to covering additional concepts in the next class.

15:06

📅 Conclusion and Preview of Upcoming Class

The speaker concludes the current class by summarizing the key points covered, including the basic accounting assumptions of going concern, accrual, and consistency. They encourage students to review these principles and to familiarize themselves with the concepts and conventions before the next class. The speaker assures that the upcoming class will wrap up the current chapter, and they express gratitude to the audience for their participation. The session ends on a positive note, with the speaker wishing the students to continue learning and growing, and promising to see them in the next session.

Keywords

💡Accounting Principles

Accounting principles are the fundamental guidelines and rules that form the basis for preparing financial statements. They provide a standardized approach to recording and reporting financial information, ensuring consistency and comparability across different entities. In the video, the instructor emphasizes that these principles are developed through study, analysis, and observation, and are generally accepted worldwide, serving as the foundation for all accounting practices and equations.

💡General Acceptance

The term 'general acceptance' refers to the widespread recognition and adoption of accounting principles across different regions and jurisdictions. It implies that these principles are not static but evolve over time, adapting to changes in business practices and economic conditions. The video script mentions that while there might be variations from country to country, the principles are generally accepted, ensuring a common ground for financial reporting.

💡Uniform Set of Rules

A uniform set of rules implies that the principles and standards applied in accounting are consistent and follow a similar pattern worldwide. This uniformity allows for a standardized approach to financial reporting, making it easier for stakeholders to understand and compare financial statements across different entities. The video highlights that these rules are man-made and are designed to be flexible enough to adapt to changing business environments.

💡Flexibility

Flexibility in accounting principles means that they are not rigid but can be adjusted or modified as per the changing needs of businesses and economic conditions. This allows for the principles to remain relevant and applicable over time. The instructor in the video explains that while the principles provide a stable framework, they are designed to evolve with new technologies, business practices, and societal changes.

💡Relevance

Relevance in the context of accounting principles means that the information provided by these principles should be useful, important, and meaningful to the users of financial statements. The video script stresses that accounting principles should be relevant to the decision-making needs of stakeholders, such as investors, creditors, and management, ensuring that the information is timely and material to their decisions.

💡Objectivity

Objectivity in accounting refers to the unbiased and fair presentation of financial information, free from personal influence or manipulation. The video emphasizes the importance of objectivity in accounting principles to ensure the accuracy and integrity of financial statements. This concept is crucial for maintaining trust in the financial reporting process and for preventing fraud and misrepresentation.

💡Feasibility

Feasibility in accounting principles indicates that the principles should be practical and easy to apply without unnecessary complexity. The video script explains that the principles are designed to be implementable, allowing accountants to follow them without facing significant difficulties or requiring excessive resources. This ensures that the principles can be effectively used in real-world accounting practices.

💡Accounting Concepts or Assumptions

Accounting concepts or assumptions are the foundational ideas that underpin the preparation of financial statements. They provide a framework for understanding and interpreting accounting information. The video discusses several key assumptions, such as the going concern, consistency, and accrual concept, which are essential for ensuring that financial statements accurately reflect the financial position and performance of a business.

💡Going Concern

The going concern concept is a fundamental assumption in accounting that a business will continue to operate for the foreseeable future. This assumption allows accountants to record assets and liabilities at historical costs and to provide for depreciation and amortization over time, rather than writing off the full cost of assets in the period of acquisition. The video script uses the example of a machine purchased for 1 lakh, expecting it to operate for 5 years, to illustrate how the going concern concept influences the recording of expenses.

💡Consistency

Consistency in accounting refers to the use of the same accounting policies and methods from one period to another. This concept ensures that financial statements are comparable over time, allowing users to assess trends and make informed decisions. The video script explains that changing methods year to year would lead to incomparable financial statements, which would not provide a true picture of the business's financial health.

💡Accrual Concept

The accrual concept is an accounting principle that requires revenues and expenses to be recorded when they are earned or incurred, not when cash is received or paid. This concept ensures that the matching principle is followed, where expenses are matched with the revenues they helped generate, providing a more accurate reflection of a business's financial performance in a given period. The video provides examples of recording an electricity bill in the month it is incurred, even if payment is made in a subsequent month.

Highlights

Introduction to the 9th day of the commerce pro series with a plan to cover the entire syllabus in the next 90 days.

Starting chapter 3 on accounting principles, which will be covered in two classes.

Emphasis on the conceptual nature of today's class, focusing on basics and principles.

Explanation of accounting principles as rules and guidelines for decision-making in accounting.

Accounting principles are generally accepted worldwide and are based on extensive study and experience.

Accounting principles are developed over time, are flexible, and can change with evolving business practices.

Accounting principles should be relevant, objective, and feasible for easy application.

Differentiation between accounting concepts or assumptions and accounting conventions.

Accounting concepts and assumptions are fundamental and developed through professional experience.

Accounting conventions are based on customs, beliefs, and may have varying legal acceptability.

Introduction to the three fundamental accounting assumptions: going concern, consistency, and accrual concept.

Definition and importance of the going concern concept in accounting.

Explanation of the consistency concept and its requirement for using the same methods year after year.

Detailed discussion on the accrual concept, distinguishing between cash and accrual basis of accounting.

The significance of recording transactions on the date they occur, not when cash is received or paid, according to accrual concept.

Overview of how the accrual concept applies to both revenue and expenses, irrespective of cash flow.

Conclusion of today's class with a reminder to review the principles, features, and assumptions discussed.

Anticipation of completing the chapter in the next class and a farewell to students until the next session.

Transcripts

What's up everyone, welcome back to the channel.

Guys, today we have come on our day 9 of commerce pro series.

And just 90 days more, 91 days more.

And in the next 90 days, we will finish the entire syllabus, accounts, business

studies, economics.

We will cover it in a great way.

You guys come and attend quickly.

Today we are going to start chapter number 3, accounting principles.

This chapter will be in two classes.

Today's class is going to be very conceptual.

We will discuss some basics and read about some principles.

And we will complete it in tomorrow's class.

So two classes and your chapter will also end.

I have made a proper playlist.

Keep watching the playlist, keep completing and keep preparing all the chapters

well.

So let's start quickly and finish things.

Let's begin.

Sir, what are these accounting principles?

What does it mean?

See kids, what does the word principles mean?

Certain rules, certain guidelines which help us in decision making.

Which helps us in doing any work.

Which helps us in understanding things and doing it easily.

So the same is the work of accounting principles.

Accounting principles have been made after a lot of study by doing study,

analysis, observation.

With the help of which the rules and regulations came.

On the basis of that, we make all the accounts.

All the accounting equations you have read or all the chapters you are going to

read in the future.

All of them will be based on accounting principles.

So sir, what does this accounting principle mean?

So what will we say?

Accounting principles have been generally accepted by the accountants all over

the world.

They are accepted all over the world as general guidelines for preparing the

accounting statements.

These principles have been developed.

How have they been developed?

Over a course of period from usage.

With reason and experience.

Along with that, statements of people.

Statements of professional bodies.

Statements of government agencies.

And what are they usually called?

Why generally accepted?

Because it differs from country to country.

There are changes.

But generally all over the world, it is accepted in this way.

That's why accounting principles are called Okay.

After this, what are the features of these principles?

First feature.

What does a uniform set of rules mean?

All these principles are a uniform set of rules which we get to see similar

worldwide.

We get to see accounting in the same way.

And we have to follow these rules as it is.

Whether we are doing 11th or 12th accounting.

Or you will do accounting of anywhere.

The rules will remain the same.

These are man-made.

People have made it with their observation.

With their practice and experiences.

These are flexible.

Flexible means that the way of doing business changes with time.

New technology comes with time.

Human behavior evolves.

Things change.

So these are also flexible enough that we can change them as per time.

As it is, they will not remain.

So what is it?

Accounting principles are not rigid but flexible.

Flexible means these are bound to change with passage of time.

Accounting principles are generally accepted.

Generally accepted means that these are guidelines, base.

There are solutions to many accounting problems.

So if an accountant gets stuck all over the world, then he can sort out things

with the help of these principles.

So these are some basic features, characteristics of accounting principles.

After reading so much, I am hopeful that you would have understood the meaning

of accounting principles.

Basic features, basic characteristics would have been understood.

Now we have, how should accounting principles be?

What should be the purpose of accounting principles?

So we will say that there should be relevance.

Relevance means that the accounting principle should be relevant, important,

useful to the owner.

All the people who are using, watching and understanding accounting principles,

then it should be relevant for them.

There should not be any irrelevant thing in it.

Second principle should be objective.

Objective means free from personal biasness.

There should not be any kind of biasness, manipulations, chances of frauds in

it.

So there should be objectivity, clarity.

There should not be any kind of fraud, manipulation.

So it should be relevant, objective and feasibility.

What does feasibility mean?

Feasibility means that we can easily apply it without any complexity.

We can easily apply it.

So principles are defined in such a way that we can easily apply them.

There is no complexity.

There will not be any difficulty in applying them.

Now we are coming to how many kinds of accounting principles can be there?

So kids, in this chapter, we are going to read two types of things.

Accounting concepts or assumptions and accounting conventions.

Now I will discuss a little on this.

What is it?

So see the concepts and assumptions.

Accounting concepts and accounting assumptions.

These kids are fundamentally found in the accounts.

Means they have been developed with experiences, usage, professional body's

experience and knowledge.

So they have been developed slowly and slowly.

So you have to see it as it is.

But the conventions.

Conventions are based on customs, are based on beliefs.

Some people believe it, some people do not believe it.

Means legal acceptability is less in them.

This legal acceptability is in abundance in them.

Means they will be followed.

How will they be followed?

It is based on different customs, different traditions, different beliefs.

Now like there is a convention in it, full disclosure.

Disclose everything fully.

So some people believe that full disclosure should be done.

There is a convention called materiality.

Just write as much as is important.

So see some people believe that full disclosure should be done.

Some people believe that it should be as much as is important.

So different beliefs are there.

So these are based on beliefs.

Not on legal applications.

These are based on legal applications which you will definitely get to see.

Okay.

So first of all today we will read accounting concepts or assumptions.

In order to make accounting language convey the same meaning to all the people

and to make it more meaningful, most of the accounting have agreed on number of

concepts which are usually followed for preparing the financial statements.

We want that accounts should be world wide acceptable, should be world wide

same.

It should not be that if we go to some other country, then our rules are not

understood there.

So all the accountants in the world have accepted certain rules, have accepted

it world wide.

We are going to read those principles here.

Okay.

Now what do we get kids?

First of all, we have three basic accounting assumptions.

There are three fundamental accounting assumptions which are through accounting

standard AS1 which are given by Institute of Chartered Accountants of India.

And we follow them.

We assume that any business whether it follows any accounting concept or not,

it must be following these three.

What are these three?

Today we will discuss on these only.

We will discuss other in tomorrow's class and the chapter will end.

Which three are there?

First of all is going concern.

Second is consistency.

Third is accrual concept.

Take a screenshot of this.

Then I am going to teach you in detail.

So first of all we are getting the going concern concept.

Sir, what is the meaning of this going concern?

See, going concern means that people will keep coming but business may go on

forever.

Business will not stop.

Now see, we go to take loan from the bank.

So the bank checks the statements and gives loan of 10 years, 15 years, 20

years.

We buy things in loan.

So our creditor also gives things in loan.

Is there any guarantee of business?

Will it happen tomorrow or not?

Bank is giving loan of 20 years.

Creditor is giving loan of 1 year.

So is there any guarantee that business will survive?

Is there any certificate that business will go on for so long?

There is nothing like that.

It may not stop.

It may stop tomorrow.

So this is our assumption.

It is a fundamental assumption that business will go on for a long time.

Business will not stop quickly.

This is called going concern concept.

It is on this concept that we record fixed assets at their original cost and

then we keep imposing depreciation on them.

Because of the concept of going concern, full cost of the machine would not be

treated as an expense.

When we bought a machine of 1 lakh and we feel that it will run for 5 years.

So we assume expense of Rs.

20,000-20,000 every year.

Business should also run for 5 years.

So this going concern concept says as per this concept, whatever happens,

people will come and go but business may go on forever.

Business will go on for a long time.

This is called going concern concept.

Is it clear?

Let's go sir.

After this, which concept is coming to us?

Please ignore this heading.

I don't know in which language the heading has come here on PPT.

Please ignore this.

This is nothing.

Which principle is this kids?

Consistency.

What does consistency concept say?

Consistency concept says you have to stay consistent on applying the various

methods.

Like we will use depreciation.

There are different methods to calculate depreciation.

There are different ways to calculate depreciation.

Different depreciation comes from different methods.

This year I calculated different depreciation.

Next year I calculated different depreciation.

So in my books, expenses of 2 years will be different.

This year different, next year different.

This is wrong.

How will I compare both?

Method will be same.

Only then I will be able to compare whether the expense is increasing or

decreasing.

So depreciation method is done.

Method to calculate stock is done.

Like we do valuation of stock.

So it also has different methods.

Similarly, many methods are available in our accounts.

So what do we have to do?

We have to follow the same methods every year.

We don't have to change our methods.

This principle says that if you want to see the true picture of your business,

want to see the actual picture, then you should follow the same rules and

regulations.

Don't change the rules again and again.

Don't change the methods again and again.

So see what is written.

This concept states that accounting principles and methods should remain

consistent from one year to another.

This should run with consistency from one year to another.

If a firm adopts different accounting principles in two accounting periods, if

used separately, profits of current year will not be comparable with the profit

of preceding year.

We cannot compare profits.

Two books of accounts are made from different methods.

So how will you compare?

If you make it from the same method, then you will say that there was growth or

downfall.

What happened?

So that's why we say that we should follow consistency.

The methods we are using should be consistent year to year.

Got it?

So going concern is clear, consistency is clear.

The third concept is accrual.

Sir, what is accrual concept?

Look son, our books of accounts can be made in two ways.

On cash basis and accrual basis.

Cash basis says that Sir, when cash will come to you or when cash will go from

you, you record the transactions at that time.

Like for example, I have to give you money for March.

I gave you in May.

So cash basis says write in May.

You have to give me money for last year.

And you gave this year.

Cash basis says write this year.

There is no meaning from last year.

According to cash basis, the transaction should be recorded when the money came

or went.

Accrual says this is wrong.

Accrual says suppose there is money for the last three years.

And this year came to you.

You wrote all this year.

Then this year your statement will look very overvalued.

In your statement, money will look increased without a doubt.

Even though it is not this year's money.

If there is money for the last three years, then we should write in the last

three years.

There is no difference whether you got it or not.

If I have a electricity bill for March.

And I am paying it in May.

Then I should write it in March.

Even if I have paid in May.

When should I write the expense?

It should be written in March.

Because that bill was for March.

This is called accrual concept.

So according to accrual concept, whatever be the expense, the day it has been

spent, that day that expense has to be written.

When did the cash go?

When did the cash come?

There is no difference with this.

Similarly, if my salary is for March.

And I got it in April.

Then I should write in March.

Not in April.

Why?

Because if I will write in April.

Then April's income will increase without a doubt.

When the income is for March.

It is a different thing that I got cash in April.

But it is for March.

So the month's expense or the month's income, you write in that month.

It is immaterial.

When am I getting it?

Got it?

And this concept also applies when there are loan transactions.

Like today I sold something on loan.

Cash basis will not record it today.

Cash basis will say record it when the money will come.

But the sale happened today.

So I should write today.

This is called accrual basis.

Similarly, I bought something on loan today.

Cash basis will say there is no need to write.

The money has not gone.

Accrual says no.

Incomplete information will be there.

If you bought something today, then write today.

I bought it on loan.

No problem.

Write on today's date.

This is the accrual concept.

So it works in revenue and also in expenses.

When will the revenue be recorded?

The date on which services or goods you have sold.

When will the expense be recorded?

When it is due.

It does not matter whether the cash has gone or not.

Okay.

So these three kids we have basic accounting assumptions.

Which ones?

Going concern, accrual and consistency.

After that, some important concepts will come which we will cover in tomorrow's

class.

These are some other concepts.

We will cover them in tomorrow's class.

And the chapter will end.

So whatever book you follow today, open it.

Mark the meaning of the principles.

Mark the features.

In the beginning, go through the concepts and conventions once.

And basic fundamental assumptions which I told you.

Going concern, accrual and consistency.

Go through them once and things will be completed.

Okay.

That's all for today.

In tomorrow's class, we will also finish this chapter.

And our chapter no.

1, 2, 3 and accounting equation will end.

Alright.

Thank you so very much everyone for joining in.

I am gonna see you all tomorrow.

Till then, take care, keep growing and keep glowing.