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 ( 1 st April to 31 st 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.