Accounting Principles By Shaswat

What are they? Accounting principles are rules which set down how the financial activities of a business are recorded. These rules are applied in everywhere, including subjects we have covered so far!

Business Entity This principle states that the owner and business are two separate legal entities. This is why the personal assets, spending, etc are not included in Final Accounts.

Duality This principle states that each and every transaction has a duel aspect; an equal amount of giving and taking. This is shown in double entry (when making purchases, cash is given while goods are recieved). In accounts we classify this as debit and credit.

Money Measurement This principle states that only items which can be expressed in monetary terms must be included in the books of account. For example, when preparing final accounts, the skill of workers or honesty of manager is not taken ino account as it cannot be valued in terms of money

Realisation This principle states that unless legal ownership of goods is transfered to the buyer, a sale is not to be recorded and so, profits are not assumed For example, if RK sir orders a marker from me , I cannot record as sales till the ownership of the marker passes on to him.

Consistency In accounting there are several methods to calculate or value an asset. This principle states that if a method is chosen, it has to be used everytime; the method cannot be changed. Eg. If you have to calculate depriciation, if you calculate it using the SLM* in year1, you can't use the RBM* in year2.

Outstanding Principle aka Accruals, aka Matching Principle states that the transactions of one business period must be matched with each other and not with transactions of other time periods. This is, in a way, the realisation principle; the transaction is considered to be done once legal ownership has passed, not when payment is received. Therefore, payments made for past/future transactions are not included in final accounts.

Prudence This principle states that profits should never be overstated and losses never understated/ profits should never be anticipated and all forseeable losses must be accounted for.

Going Concern This principle states that when preparing accounts, it is assumed that the business will last forever and so assets and liabilities must be shown at their book values(not over/understated)

Materiality This principle states that items of very low value need not be recorded as the cost of recording them might be greater than that of the item. Instead, they are recorded under general/office expenses. Keep in mind that this is relativistic; what might be small for one business might not be small for another.

Historical Cost This principle states that all assets and expenses are to be recorded at their actual cost.

Accounting period This principle states that all accounts are to be prepared at timely intervals. These are usually yearly or half yearly and sometimes quartery. This allows businesses to make comparisons on how it is performing compared to how it performed last year

Substance over form This states that that a transaction should not be recorded in such a manner as to hide the true intent of the transaction, which would mislead the readers of a company's financial statements.

Why? We need to follow these principles for 4 crucial reasons: Understandibility Comparibility Relevence Reliablility