Page 28 - DCOM101_FINANCIAL_ACCOUNTING_I

Financial Accounting-I

Notes However, looking on the positive side of things, all this number-pumping without any basis
in good accounting ensured that the Enron bankruptcy, in the words of the US Treasury
Secretary, Mr Paul O’Neill, had no “spill-over effect.’’

The downside, of course was that it did not do anything for its profits because of the steady

erosion in its trading margins (caused, ironically enough, by the entry of many players into
a market created by Enron) from 5.3 per cent in 1998 to less than 1.7 per cent in the third
quarter of the current year.
In retrospect, it would seem that the company made frantic attempts to keep up its profi ts
in spite of diminishing margins through various methods, including the setting up of
several off-the-balance sheet entities represented as independent of Enron to which it sold
assets or portfolios of assets.
It created so-called special purpose entities (SPEs) like the Chewco and JEDI partnerships
to get assets like power plants off its books. Enron was able to do this because, under
standard accounting, a company is allowed to spin off its assets — and related debts — to
an SPE if an outside investor has put up capital worth at least three per cent of the SPE’s
total value.
These methods also stretched across the lumping of assets into its trading business and the
booking as operating revenues the proceeds of the sale of fi xed assets.
Gaps, it would seem, abound in GAAP....
Source: http://www.thehindubusinessline.in/2002/01/20/stories/2002012001470100.htm

3.2 Accounting Concepts and Conventions

Accounting principles are broadly classified into three categories, these are:

1. Accounting Concepts
2. Accounting Conventions

3.2.1 Accounting Concepts

The following are the most important concepts of accounting:
1. Money measurement concept

2. Business entity concept
3. Going concern concept
4. Matching concept
5. Accounting period concept
6. Duality or double entry concept

7. Cost concept
8. Revenue Recognition Concept
9. Full Disclosure Concept
10. Objectivity Concept

Let us understand each them one by one.

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