ACCOUNTING PRINCIPLES

Accounting principles are the general rules which are used as guidelines in accounting and as the basis of practice. These principles can be classified into two categories:

1. Accounting Concepts
2. Accounting Conventions

Accounting Concepts

Separate Entity Concept

Every business is a separate entity from the proprietor. Business and owners are distinct.

Dual aspect Concept:

Every business transaction has two aspects – Debit. For example “Cash Received from Mr. Gupta Rs. 5000” has two aspects “Cash” – Real account and “Mr. Gupta” – Personal Account.

Going Concern Concept

It is assumed that the business will exist for an indefinite period of time and transactions are recorded from this point of view.

Money Measurement Concept

Those transactions and events are recorded in accounting only when they can be expressed in terms of money. Accounting records only financial character of the business. In other words, an event howsoever important may be to the business will not be recorded unless its monetary effect can be measured with a fair degree of accuracy. Thus, labour management relations, sales policy of the enterprise, effect of the retirement of managing director etc. do not find place in accounting.

Cost Concept

All transactions are to be recorded in the books of accounts at their Cost Price when purchased, not on Market Price. The personal views of people are not considered as the proper basis for making the record. Suppose a firm purchases a piece of land for Rs. 50,000 and may consider it worth Rs. 70,000 but the entry in the books of account will be made for Rs. 50,000 or the amount actually paid.

Matching Concept

At the end of the financial year all costs (expenses) of the organization are to be matched against the revenues of the organization of the current year. Increments made by the business during a period can be measured only when the revenue earned during a period is compared with the expenses incurred for earning that revenue.

Accounting Period Concept

Uniformity in accounting period should be maintained in order to provide for intra firm comparison. Performance of one year can be compared with other only when uniformity in accounting period is maintained.

Accrual concept / Realisation Concept.

Transaction should be recorded on due basis. Expenses / Incomes are recognized and recorded on accrual basis. Actual receipt/payment is irrelevant for recognizing income/expense.

Business Entity Concept.

Accountants assume that an enterprise is separate from its owner. This concept is based on the sense that proprietors entrust resources to the management; the management is expected to use these resources to the best advantage of the firm and to account for the resources placed at its disposal. The concept of separate entity is applicable to all forms of business organisation.

Accounting Conventions

1. Materiality

An accountant should disclose all the material facts and should ignore insignificant details. Accounting records should consist only of such events as are significant from the point of view of income determination.

2. Consistency
   

Accounting procedures or practices should remain the same (consistent) from one year to another.

3. Conservatism
   

An accountant should be conservative and prudent. Profits are not to be expected and provision should be made to encounter losses. Valuing stock at Cost Price or Market Price whichever is lower, and creating provision for doubtful debts are the examples of applications of the principle of conservatism.