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CH 10-Accounting Principles

The document outlines 10 key accounting principles: business entity, consistency, duality, going concern, historic cost, matching, materiality, money measurement, prudence, and realization. It provides details on what each principle means and how it is applied in accounting.

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ayten.ayman.eleraky
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11 views

CH 10-Accounting Principles

The document outlines 10 key accounting principles: business entity, consistency, duality, going concern, historic cost, matching, materiality, money measurement, prudence, and realization. It provides details on what each principle means and how it is applied in accounting.

Uploaded by

ayten.ayman.eleraky
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Accounting Principles/Accounting concepts/Accounting Conventions

➢ They set down the rules of how the financial activities (money related activities) of
business are recorded.
➢ These rules must be applied by everyone who is involved with the task of recording
financial transactions.
➢ If not, it would be impossible for others to understand the financial position of the
business and to make comparisons between two or more businesses, if each had
applied their own rule.
The main Accounting principles are as follows:
1. Business entity principle or Accounting entity principle
➢ According to this principle, the business is treated to be separate from that of the
owner.
➢ Therefore, the personal activities of the owner are not recorded in the books of
account and only the business activities are recorded.
➢ However, if there is a transaction connecting the business and the owner, then it is
recorded.
E.g., capital introduced by the owner, the amount of drawings taken.

2. Principle of consistency
➢ This principle states that while selecting ‘a choice of method ‘, that particular ‘choice
of method’ must be used consistently (continuously, without changing) from one
accounting period to another, otherwise, it is not possible to make comparisons and
the profits maybe incorrect.
➢ However, when there is a change in the ‘choice of method’ for a good cause, the
effect of this must be noted in the financial statements.

3. Principle of duality/Dual aspect principle


➢ According to this principle, every transaction had two (dual) aspects. One is the
giving and the other is the receiving aspect. Therefore, the double entry system is
followed to record it twice-one in the debit side and the other in the credit side.
➢ Eg- for the transaction, purchase of machinery, machinery comes into the business,
so this account is debited, and cash goes out of the business so, the cash/bank
account is credited.

4. Going concern concept


➢ According to this concept, it is assumed that the business will continue to operate in
future for an indefinite period of time and it has no intention to cease (stop) its
activities in future or reduce its size.
➢ However, if the business decides to close down in near future, the value of non-
current assets will be shown as per their ‘expected sales value ‘, not at book value
(original cost less depreciation)
5. Historic cost principle
➢ This principle states that all assets and expenses are recorded initially at their actual
cost in the ledger accounts. (ignoring that their value has increased or decreased
over time)
➢ This is a disadvantage while making comparisons between two time periods due to
the rate of inflation (general rise in prices in the economy)

6. Matching Principle /Accrual Principle


➢ According to this principle, a business should record an expense in the income
statement in the same period when it earns the revenue.
➢ The timing of the actual receipts and payments is ignored.

7. Materiality principle
➢ As per this principle, all individual items which are of low value (items which are
considered to be not material) are grouped together and charged under
“general expenses or sundry expenses” rather than having individual ledger
accounts for those non-current assets.
➢ This is because the cost of these items will not significantly affect the profit.
Eg – purchase of a calculator or envelopes.

8. Money measurement principle


➢ According to this principle, only the information which can be expressed in terms
of money are only recorded in the accounting records.
➢ Other aspects of the business which cannot be measured in terms of money are
ignored.
Eg- the efficiency of a manager, the benefits of a training programme.

9. Prudence Principle/Principle Of Conservatism


➢ As per this principle, a business should not overstate (showing more value than
its real value) ‘the profits and assets and losses and liabilities should not be
understated (recording less value, when its value is actually more)
➢ This principle applies the phrase ‘never anticipate a profit but provide for all
possible losses.’

10. Realisation principle


➢ As per this principle, revenue is considered as being earned only if the ‘legal title
of the goods or services passes from the seller to the buyer.
➢ Profits are considered to be earned only when the goods actually change hands
and not when an order has been placed by a customer. The credit sales are also
treated in the same manner.

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