ACCOUNTING PRINCIPLES
ACCOUNTING PRINCIPLES
FUNDAMENTAL ACCOUNTING ASSUMPTION OR CONCEPTS:-
1- Going Concern Assumption: According to this assumption, it is assumed that business will continue for a foreseeable period and there is no intention to close the business or scale down it's operations significantly.
2- Consistency Assumption: According to the Consistency Assumption, Financial Statements should be prepared on the same basis as that of the preceding period. Though, consistency is important to make the accounting data comparable, this does not mean that change cannot be made in a business unit's accounts. In the event of any change (when there are good reasons for it), a note must be attached along with the accounting statements indicating the alternation(s).
3- Accrual Assumption: According to Accrual Assumption, a transaction is recorded in the books of account at the time when it is entered into and not when the settlement takes place.
ACCOUNTING PRINCIPLES:-
1- Business Entity Principle: According to this principle, a business is treated as a separate entity that is distinct from its owner(s) and all other economic proprietors.
2- Money Measurement Principle: According to this principle, only those transactions that can be expressed in terms of money are recorded in books of account. In other words, money is the common denominator in recording and reporting all transactions.
3- Accounting Period Principle: According to this principle, the life of an enterprise is broken into smaller periods (usually one year) so that it's performance is measured at regular intervals.
4- Full Disclosure Principle: According to this principle,"there should be complete and understandable reporting on the financial statements of all significant information relating to the economic affairs of the entity".
5- Materiality Principle: The Materiality Principle refers to the relative importance of an item or an event.
6- Prudence or Conservatism Principle: Under this principle, the working rule is:"Anticipate no gain but provide for all possible losses". Thus, the accountant should record not only actual losses but also those losses that are likely to occur.
7- Cost Concept or Historical Cost Principle: According to the Cost Concept, an asset is recorded in the books of account at the price paid to acquire it and the cost is the basis for all subsequent accounting of the asset. The market value of an asset may change with the passage of time but for accounting purposes, it continues to be shown in the books of account at its book value (i.e., cost at which it was purchased minus depreciation provided up–to–date).
8- Matching Principle: According to this principle, the income of a given period should be matched with the expenses of the same period.
9- Dual Aspect or Duality Principle: According to this principle, every transaction has two aspects, a debit and a credit of equal amount, and both the aspects are recorded in the books of account.
10- Revenue Recognition Concept: According to this Concept, revenue from any business transactions should be recognized (recorded) in the accounting books only when it is realized.
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