Accounting Conventions and Classification of Accounting Event

As we have learned about Accounting Concept in our previous blog, we will now learn about Accounting Conventions, and not only that we will be also learning about the Classification of Accounting events.

So, there are 3 types of Accounting Conventions and they are as under -

Going Concern

Accounting Records, Events, and Transactions on the assumption that the entity will continue to operate for an indefinitely long period of time.

Consistency

The Accounting policies and methods followed by the company should be the same every year. Following are the examples -

Accrual

In general, it is assumed that the accounts are always prepared based on the accrual basis. However, there are entities that follow the Cash Basis of Accounting also.

The Company Law or Income Tax Act prescribes all companies to follow the Accrual Basis of Accounting except for professional firms and Government organizations which are allowed to follow the Cash Basis of Accounting.

Now, let us talk about the Classification of Accounting Event and there are 3 parts of Accounting Events and they are -

Capital Item

Any Expenditure that creates an asset for example -

Revenue Item

An Income or Expenditure and the benefit will be exhausted within a year i.e. the calendar year of the financial year whichever is set up for the set of books. In simple terms, this is an event that generates revenue, and the related cost to earn the revenue are accounted as expenses.

Deferred Revenue Expenditure

It is neither a Capital nor Revenue and the benefit of which will be realized for more than a year (exceeding beyond the calendar year for the set of books) and does not result in the creation of an asset. Examples are -

So, these were the important and advanced Accounting learnings. In our next blog, we will be knowing about another basic of Accounting i.e. Rules of Accounting and more....