ACCOUNTING PRINCIPLES

Accounting principles can be subdivided into

two categories:

        Accounting Concepts; and

        Accounting Conventions.

        Accounting Concepts

        Accounting Conventions

The term ‘concept’ is used to connote accounting postulates, that is necessary assumptions and conditions upon which accounting is based. The term ‘convention’ is used to signify customs and traditions as a guide to the presentation of accounting statements.

Accounting Concepts

• Business Entity Concept

• Money Measurement Concept

• Cost Concept

• Going Concern Concept

• Dual Aspect Concept

• Realization Concept

• Accounting Period Concept

Accounting Conventions

• Convention of Consistency

• Convention of Disclosure

• Convention of Conservation

Accounting Concepts

The term ‘concept’ is used to connote accounting postulates, that is necessary assumptions and conditions upon which accounting is based.

Business is treated as a separate entity or unit apart from its owner and others. All the transactions of the business are recorded in the books of business from the point of view of the business as an entity and even the owner is treated as a creditor to the extent of his/her capital.

In accounting, we record only those

transactions which are expressed in

terms of money. In other words, a fact

which can not be expressed in

monetary terms, is not recorded in the

books of accounts.

In accounting, life of the business is

perpetual but still it has to report the

results of activity undertaken in one

year. So final accounts are prepared

for the accounting period which is 12

months period and normally it is the

Financial Year ( 1st April to 31st March).

Transactions are entered in the books of accounts at the amount actually involved. Suppose a company purchases a car for Rs.1,50,000/- the real value of which is Rs.2,00,000/-, the purchase will be recorded as Rs.1,50,000/- and not any more. This is one of the most important concept and it prevents arbitrary values being put on transactions.

It is persuaded that the business will

exists for a long time and transactions

are recorded from this point of view.

The entity is assumed to remain in

operation sufficiently long to carry out

its objects and plans.

Each transaction has two aspects, that

is, the receiving benefit by one party

and the giving benefit by the other.

This principle is the core of

accountancy.

For example, the proprietor of a business starts his business with Cash Rs.1,00,000/-, Machinery of Rs.50,000/- and Building of Rs.30,000/-, then this fact is recorded at two places. That is Assets account (Cash, Machinery & Building) and Capital accounts. The capital of the business is equal to the assets of the business.

Thus, the dual aspect can be expressed as under

 

Capital + Liabilities = Assets

or

Capital = Assets – Liabilities

This concept emphasizes that profits

should be considered only when

realized . Accounting should take into

consideration profits only when the

same have been realized.

Matching concept requires that expenses should be matched to the revenues of the appropriate accounting period. So we must determine the revenue earned during a particular accounting period and the expenses incurred to earn those revenues.

Accrual is concerned with expected future cash receipts and payments : Accounting attempts to recognize non-cash events and circumstances as they occur.

Examples are – purchase and sales of goods on credit ,wages and salaries outstanding.

This concept presumes that the purchasing power of monetary unit ,say, rupee, remains the same throughout , thus ignoring the effect of rising or falling purchasing power of monetary unit due to deflation or inflation.

Accounting Conventions

The term ‘convention’ is used to

signify customs and traditions as a

guide to the presentation of

accounting statements.

In order to enable the management to draw important conclusions regarding the working of the company over a few years, it is essential that accounting practices and methods remain unchanged from one accounting period to another. The comparison of one accounting period with that of another is possible only when the convention of consistency is followed.

This principle implies that accounts must be honestly prepared and all material information must be disclosed therein. The contents of Balance Sheet and Profit and Loss Account are prescribed by law. These are designed to make disclosure of all material facts compulsory.

Financial statements are always drawn up on rather a conservative basis. That is, showing a position better than what it is, not permitted. It is also not proper to show a position worse than what it is. In other words, secret reserves are not permitted.

Financial statements are always drawn up on rather a conservative basis. That is, showing a position better than what it is, not permitted. It is also not proper to show a position worse than what it is. In other words, secret reserves are not permitted.

Financial statements are always drawn up on rather a conservative basis. That is, showing a position better than what it is, not permitted. It is also not proper to show a position worse than what it is. In other words, secret reserves are not permitted.