Accounting Concepts and Conventions (Principles)Accounting principles may be defined as those rules of action or conduct, which are adopted bytheAccount ant s un ive rsa l l y whi le recor d ing accounting t r ansactio ns . In ter nationa l Accounting Standard (IAS) 1 defined Accounting principles as “a body of doctrines commonly associated with theory and procedures of Accounting, serving as an explanation of current practices and as a guidefor se lectio n of co nventio ns or pro cedu res whe re a l te rnatives ex i s t” . To ensur e acceptance , acco unting pr inc ip le must be capab le o f cop ing wi th practica l recor d ing pro b lem, i t must be reasonably objective and feasible, and it must not be expensive to apply and should lead to similar answers in the hands of practitioners. Accounting principles can be classified into two categories, namely, accounting concepts and accounting conventions

Accounting ConceptsThis refers to those basic assumptions or conditions upon which the science of Accounting is based. They are usually rules and conventions that lay down the way in which activities of a business are recorded. These concepts are:1)Business Entity Concept: This concept states that every economic unit, regardless of its legal form of existence, is treated as a separate entity from parties having propriety or economic interest in it. In Accounting, a business organization is considered as a separatee n ti t y f r o m i t s p r o p r i e t o r ( s ) . T h i s c o n c e p t i s a p p l i c a b l e t o a l l f o r m s o f b u s i n e s s organizations.7

2)Going-Concern Concept: Th is i s the as sumption that a bus iness un i t wi l l co ntinu e to operate into perpetuity; that is, the business is not expected to liquidate in the foreseeablefuture.3)Periodicity Concept

: According to this concept, the life of the business is divided into appropriate periods for the purpose of determining its results of operations. In accounting, such a seg ment or time in terva l i s ca l led “accounting per iod” , and i t i s us ua l l y a year . Though, a business organization may produce quarterly or half yearly abridge financial statement, before the end of its financial year, for the purposes of planning, performance evaluation and control.4)Realization Concept: This concept states that revenue is recognized when transaction is co mplete d, w het her payment i s rece ived or not , that i s im mater ia l . For e xam ple i s considered complete at the point when the property in goods passes to the buyer and he/she becomes legally liable to pay.5)Matching Concept: This concept states that all the revenue earned and all the expenses incurred in generating the revenue should be matched together and reported for the period, with a view to determining the net financial position of the business. Thus, all expenses incurred (whether they are actually paid for or not) should be match against the revenue earned (whether they are actually received or not).6)Historical Cost Concept: T h i s c o n c e p t s t a t e s t h a t t h e b a s i s f o r i n i ti a l a c c o u n ti n g recognition of all assets acquisitions, services rendered or received, expenses incurred, creditors and owners’ interests is the actual cost for the transaction(s).7)Money Measurement: This concept states that accounting is only concern with those facts that can be measured in money terms with fair degree of accuracy and objective.8)Dual Aspect Concept: This concept states that there are two aspects of accounting; one is represented by the resources owned by a business and the other by the claim against them. Double entry is therefore meant to uphold this concept.Accounting Conventions These are approaches which are followed by the Accountant in the application of the accounting concepts. These include:1)Conservatism/Prudence: This convention states that greater care should be taken in the recognition of profit and all known expenses, even those that cannot be exactly

determined, should be adequately provided for in the accounts. In other words, when the Accountant is faced with the problem of choice between alternative courses of action, he should opt for a method that would understate, rather than overstate the financial position of the business.2)Materiality: The principle holds that only items of material values are accorded their strict accounting treatment. In other words, materiality may affect the way an item is reported in the books of account. An item is said to be material if its disclosure or non-disclosure can affect the judgments to be reached by a user on the financial statements.3)Consistency Concept: This concept holds that when an enterprise has adopted a method of treating an item or accounting transactions in the books of accounts, it should continue to use that method in subsequent periods so that comparison of accounting figures over time co u ld be po ss ib le . Th us , i t fo l low s ther efo re t hat , w here i t becom es neces sar y for any method to be change, the Accountant should report the reasons for such change and its implications on the financial statements of the business.4)Substance over Form: Th is co nventio n s ta te s that bus iness t r ansactio ns shou ld be accounted for and presented in accordance with their substance and financial reality and not necessar i l y wi th the i r leg a l fo rm. In o ther wo rds , whe re t here i s co nflic t be tw een t he financial reality of a transaction and its legal form, the financial reality (i.e. the substance) should take precedence over the legal form.8

SUSPENSE ACCOUNT AND CORRECTION OF ERRORSDue to the imperfection of human beings, it is inevitable that errors would exist in the accounting records. Although it may be difficult to eliminate errors completed, however they can be reduced to the barest minimum. To reduce errors in accounting records, what should be done, among other measures, is to engage the services of well trained personnel to maintain accounting records.3.1 Types of Book-keeping ErrorsThere are two types of book-keeping errors, namely :(a) errors that do not affect the agreement of the Trial Balance; and(b) errors that affect the agreement of the Trial Balance.3.2 Errors Not Affecting the Agreement of the Trial Balance

These are errors that despite the existence, the trial balance would still agree. They consist of the following:( i ) E r r o r o f O r i g i n a l E n t r yThis is an error in which a wrong figure (amount) is used to observe correct double- entry. For e x a m p l e , a s u m o f N 2 5 , 0 0 0 r e c e i v e d f r o m a D e b t o r m a y b e w r i tt e n a s N 5 2 , 0 0 0 w h i c h i s subsequently debited to the cash book and credited to the Debtor’s account. This example is an error of transposition.(ii)Error of Complete OmissionThis is an error involving failure to post a transaction completely into the relevant accounts, that is, no account is debited and no account credited. This may be due to the loss of the source document. For example, a purchase invoice may be misplaced as a result of which it was not recorded in the purchases day book causing the transaction not to be debited to purchases account nor credited to the supplier’s account.( i i i ) E r r o r o f P r i n c i p l eThis is an error whereby a transaction is posted to the wrong class of accounts. For example, the cost of office furniture may be wrongly debited to office expenses account (an account belonging to the class of nominal accounts) instead of office furniture account (an account belonging to the class of real accounts).( i v ) E r r o r o f C o m m i s s i o nThis is an error involving the posting of a transaction to a wrong account within correct class of accounts. For example, payment to a creditor named Auwal may be wrongly debited to the account of another creditor named Awwal. Both names are almost identical in spelling and both accounts, of course, belong to the class of Creditors accounts.(v )Er ror o f Com plete Reversa l o f Entr yThis is an error involving the complete reversal of the normal double-entry for a transaction. For example the payment by cheque for salaries may be wrongly debited to bank account, as well as, wrongly credited to salaries account.( v i ) C o m p e n s a ti n g E r r o r sThis is a situation in which errors occurred in such a way that by coincidence they cancel one another. For example, the under cast of the

debit side of cash book by, say N25,500 would be cancelled out if, sales account is understated by the same amount, i.e. N25,500.

3.3 Errors Affecting the Agreement of the Trial Balance22

These are errors the existence of which would cause the Trial balance not to agree. They consist of the following:

(i) Error of Over or Under Cast

This is an error involving wrong addition of figures. For example if the sales day book is wrong casted, the total of credit sales posted to the credit side of sales accounts in the ledger will be greater than or less than the actual figure, thereby affecting the agreement of the Trial Balance.

(ii) Error of partial reversal of entry (Error of Misplacement)This is an error involving reversal of one leg of the double- entry for a transaction. For example, the double-entry for the payment of wages in cash is: debit wages account, credit cash account. If wages account is correctly debited but cash account is also debited, this amounts to an error of partial reversal of entry — the reversal of the credit entry of the cash account. This error alwaysresults in the two legs of a double-entry appearing on the same side, either both entries will be on the credit side or both on the debit side, as in the case of this example. To correct this error, the amount involved would be doubled, and the correct entry observed in the account in which the entry was reserved.

(iii) Error of Omission or Misstatement of Old Account BalanceThis is the omission or misstatement of old account(s) balances, i.e. balance b/d from the previous period, thereby leading to less than the correct amount in the account and consequently affectingthe agreement of the Trial Balance.(iv)Error of Partial OmissionThis is an error whereby one aspect of the double-entry for a transaction is posted without posting the corresponding entry. For example, where rents is paid in cash, and rent account was credited but cash account entry was omitted, leading to one leg in, one leg out. This type of error will affect the agreement of the trial balance.

(v)Error of Omitting Journal TotalsIf the totals in the journals (purchases, sales, return outwards or return inwards) are not posted to the relevant accounts, the balancing figures in the affected accounts would be wrong, resulting in the d is ag reem ent o f t he t r ia l ba lance . Fo r ex am ple i f the tot a l sa les f r om the s a les journa l i s N55,000 and that has not been posted to sales account, the sales account figure will be less by the same amount, thereby leading to the disagreement of the Trial Balance.

(vi) Error of ExtractionThis is an error which results, as book-keepers extract (draw) trial balance from the ledger account balances. The balances may be correct but, but on extracting them to the trial balance, error may be committed. For example cash account balance of N35, 000 was taken to the Trial Balance as but N53,000. This error would cause the debit side of the trial balance to be greater than the creditside. Extraction error is usually an error of transposition leading to overcast or under cast of theamount involved.(vii)Error of SlideError of slide mostly results to overcast or under cast. For example crediting a supplier’s account with N54,000 instead of N45,000 is an error of slide or specifically error of overcast and debiting machinery account with N26,000 instead of N62,000 is an error of slide or specifically error of under cast. These types of errors affect the agreement of the Trial Balance.

(viii) Error of Misplacing Ledger BalanceAfter ba lanc ing off ledg er acco unts , the ba lance s a re t oo he taken t o t he re levant s ide s of t r ia l Ba lance . Whi le tak ing t he ba lance s to the t r ia l ba lance , th e boo k-kee per m ig ht r ecord a deb i t balance on the credit column of the trial balance and vice versa. For example sales balance of N7,000 might be recorded on the debit column instead of the credit column of the Trial Balance.23

3.4 Suspense AccountWhen a Trial balance does not balance and there is no time or it is inconvenient to immediatelylocate and correct the errors because the final

accounts are urgently required, the Trial balance can be made to balance by inserting the balancing figure and describing it as Suspense Account. Inother words, a Suspense Account is an account created in order to make a disagreed trial balance agree, by showing the difference in the disagreed trial balance. For example, if the total of the debit balances is greater than the total of the credit balances, a suspense account is to be created and credited with the difference in order to ‘force the trial balance to agree’. If the Suspense account balance is a debit, it shall be classified as a current asset in the balance sheet while it shall be classified as a current liability if it is a credit balance. Suspense account must however not be carried in the books for an unreasonable length of time. The creation of suspense account is just a temporary measure taken by a bookkeeper pending the discovery of the mistake(s) or error(s) that led to the disagreement in the trial balance. As soon as the book-keepingerr ors caus ing the d i sag reem ent of the t r ia l ba lance to ta ls ar e d i sco vered and co rre ct ed , the suspense account would automatically close itself. In other words, the only way Suspense Account can be eliminated is to locate and correct the errors that necessitated its creation in the first place. In c los ing th e susp ense acco unt a l l t he er ror s w hose second entr ies ar e not kno wn are to be recorded in it, debit or credit side. The errors that are corrected through suspense account are errors affecting the agreement of the Trial Balance. As all the errors are corrected, the two sides of the account, inclusive of the sundry error, would be equal, thereby closing the Suspense Account. Suspens e account i s not re levant w hi le co rrecting boo k-kee p ing err ors that do no t affect t he agre ement of the t r ia l ba lance . I t i s how ever , necess ar y whi le corr ecting erro rs aff ecting the agreement of the trial balance. This is because, in correcting those errors, it would be clear as to where the first entry will go but, it would not be clear as to where the second entry will go and, for that reason, suspense account is to stand for the unknown account, receiving the second entry.3.5 Entries Required to Correct ErrorsAs mentioned abo ve , w i t h re spect t o t he first type o f er ror s ( i .e . tho se t hat do n ot affect the agreement of the Trial balance), they do not necessitate the creation of Suspense Account because they do not cause the Trial balance not to balance. For this reason, the double- entries needed

to correct these errors are not passed through the Suspense Account. On the other hand, the second types of errors cause the Trial balance not to agree and therefore necessitate the creation of Suspense Account. Therefore, double-entries made to correct such errors are passed through Suspense Account so that after all such errors have been corrected, the Suspense Account balance disappears.3.5.1 Correction of Errors after Final Accounts Had Been Drawn UpWhere final accounts had already been prepared before effecting correction of errors, it would be necessary, in addition to the entries to correct the errors, to;(a) reverse the values of the balance sheet items affected by the errors; and(b) recalculate the net profit obtained in the Profit and Loss Account.24