Accounting Principles

Principles of Accounting:

  • Accounting principles means some guidelines to record the business transaction.
  • Accounting principles are classified into Accounting concepts and Accounting conventions.
  • Accounting concepts are the basic assumptions or conditions on which the entire accounting is based.
  • Accounting conventions are traditions or circumstances which guide the accountant in preparing accounting statements.

Accounting Principles

Concepts

Conventions

Business entity Consistency
Money measurement Full disclosure
Going Concern Conservation
Cost concept Materiality
Dual aspect
Accounting period
Matching concept
Realisation
Objective evidence
Accrual

Accounting Principles

Business entity Concept: This concept states that business and its owner are two different entities. Business unit has got its individuality and Owner is a separate person. Therefore when owner invested huge amount in business that amount is shown as capital and represents owner interest. From the business entity concept it is a liability. In a similar manner any cash or goods withdrawn by owner from business to meet personal expenses or for personal use called drawings. Drawings reduces owner’s equity in business. That is why drawings are deducted from capital.

Money Measurement concept: In accounting all the transactions are recorded in terms of money. A transaction without monetary effect is not a business transaction. It can’t be recorded in Accounting Books. The activity which expressed in terms of money is only recorded.

For eg: A trader sold 5 kgs rice and 2 ltrs oil.

This transaction recorded in cash worth or value of quantity i.e., 5 kgs @ 50/- each i.e., 250/- and 2 ltrs @ of each 75/- i.e., 150/-.  Total sales made Rs.400/-.

Going concern concept: Every trader will start business to earn profit continuously. He want to exist in the market forever.  A trader wants to continue business at profit for an indefinite period.  So transactions are recorded in going concern concept. Fixed assets are recorded at their original values.  Similarly prepaid expenses are treated as assets and income received in advance is treated as liability (for future period).  This is so because, business is started for continuous existence.

Cost concept: It is near to going concern concept.  All the assets are recorded at cost i.e., the actual amount paid and not at market value.  If any fluctuations are there, to avoid loss we have to maintain provision. i.e., Provision for depreciation.

Dual aspect concept: For any transacting there are two concepts. i.e., In other words for every transactions there is debit and credit aspect. We record both aspects of business transactions in books of accounts under double entry system. According to this concept for every debit there is an equal opposite credit.

Under dual aspect concept accounting equations is Assets = capital + Liabilities

i.e., Building 100000/- + Furniture 5000 + Cash = 50000+stock 5000 = Creditors 75000+capital 130000/-

Accounting period concept: Recording transactions in the books can not give any information about firm’s profit or loss.  Therefore we close down the books after some period and summarise the accounts to know the profit or loss. Generally every 12 months period, trader close the books and check the result of the business by preparing end accounts/statements.

Matching concept:  This is based on above concept.  According to this concept every 12 months is considered as a period. Revenues are matched with expenses for the period to know profit or loss.  Revenues are considered when they realised and expenses when they actually occurred.

Realisation concept: According to this concept. Revenue is considered as being earned on the date at which it is realised or to be realised to know net income.

Objective evidence concept: According to this concept every transaction should have some evidence. It may a receipt or voucher or invoice.

For example: Goods are purchased for cash then cash memo is evidence.  If you deposited cash in bank, bank voucher is evidence.

Accrual concept: According to this concept expense are  recognised in the accounting period for which they are incurred or due (outstanding)

Accounting conventions

Convention of Consistency: The accounting rules should not change from year to year.  They should be continuously applied.

For Eg: For valuation of stock cost price in a year and market price in the next year is not desirable. Comparison of accounts becomes difficult. So valuations of stock at cost or market price whichever is less to be considered. It means it does not completely prohibit changes. If it is desirable it can be implement and stated in the financial statements.

Convention of full disclosure:  According to this all accounting statements should be honestly prepared and fully disclosed; which is useful to proprietors, creditors and investors.

Convention of conservatism or prudence: This convention is safe and possible for prudency.  For eg: closing stock will be shown in books either cost or market price whichever is less. If market price is higher than the cost then stock will be valued at cost vice versa.  So this principle are inherent in the valuation of stock for prudency.

Convention of materiality:  Disclosing of information in accounting statements will depend on their materiality i.e., on their importance.

For eg:  purchase of dustbin for Rs.100/- is treated as expense and shown in expenditure rather than asset etc. The recognition of such amount as expense or asset depends on their use of importance and period of benefit of that item

To know more on accounting read below articles

Functions of Accounting Click Here

Different types of Accounting Click Here

To learn Tally ERP 9 for Free Click Here

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