Accounting priciples

1. Money measurement
- Only monetary transactions that can be measure in terms of money are recorded in accounts.
- Non-monetary aspects of the business are ignored.

Example: Following transactions are not entered in accounting records as they cannot be quantified in
money term:
- Introduction of a new brand by the company.
- Highly efficient senior management/employees.
- Products launched by a competitor.
2. Business entity
- Business and its owner/owners are separate entities as far as accounting is concerned.
- Transactions shall be recorded from business point of view.
- All transactions between the business and the owner/owners shall also be recorded.

Example: Following transactions with the owner are entered in accounting records:
- Introduction of assets in the business by the owner are credited to ‘Capital account’
- Withdrawals from the business for personal use are debited to ‘Drawings account’
3. Going concern
- It is assumed that the business shall continue operating for an indefinite time period.
- No intentions to scale down or close the business operations.

Example:
- Non-current assets are shown at their net book value in the balance sheet.
- If going concern is violated, purchase of assets will have to be treated as revenue expenditure
or the assets shall be presented in the balance sheet at their realizable values.
4. Duality
- Every transaction in accounting records will have TWO aspects or effects – debit and credit.
- It helps in maintaining systematic record of all business transactions.

Example:
- If debits and credits are not equal for accounting records, it will not be possible to prepare a
trial balance.
- Financial statements may not present accurate results.
5. Realization
- Revenue or income should be realized only when it is earned or has been accrued.
- Sale of goods are recorded when the goods are delivered and their ownership is transferred to
the buyer.
- Sale of service are recorded when the provision of services has been completed.
- Business has established a right to receive the money towards the sale
Example:
- Revenue from sale of goods is not recorded when customers just place an order.
- Revenue can be recorded even if the value of goods is not received in cash currently and it is
certain that the customers will pay it in the future.
6. Matching
- Expense or costs shall be recorded in the period in which they have actually accrued (or have
been incurred) irrespective of actual payment.
- Expense incurred to earn the revenues shall be matched with such revenues to arrive ate the
correct profit or loss.
- Actual payment of expense is ignored when matching expenses with the revenues.
 Example:
- Transfer of annual expense to the income statement irrespective of short or extra payment
during the period.
- Provision for doubtful debts recorded based on the closing trade receivables.
- Appropriate depreciation on non-current assets charged as an expense.
7. Prudence
- Record all possible or expected expenses and losses in advance.
- Do not record possible or expected gains and incomes.
- Profits and assets are never overstated, they may be understated.
- Liabilities are not understated, they may be overstated.

Example:
- Provision for doubtful debts recorded based on the closing trade receivables.
- Inventory recorded at ‘lower of cost or net realizable value’.
8. History cost
- All assets and expense shall be recorded in the accounting records as their cost.
- Assets to be carried forwards in the balance sheet as cost.
-
Example:
- Non-current assets are carried forwards at cost less accumulated depreciation even if the current
value of asset is high.
9. Materiality
- Transactions to be recorded in accordance with other principles keeping in mind the materiality.
- A transaction is material it can affect the decision-making of the users of the financial records.
- Materiality cannot be defined in numerical values but differs among business.

Example:
- Purchase and use of stationary for more than one year is treated as an expense instead of a
capital expenditure.
- Various small expenses can be clubbed as ‘miscellaneous expenses’ in income statement.
10. Consistency
- When accounting policies or methods are chosen, they shall be applied consistently each
year.
- This ensures better comparability of financial information between businesses and between
multiple periods of the same business.

Example:
- Method of depreciation (straight line, written down value, etc.) chosen shall be applied
consistently each year.
- Cost flow assumptions for inventory (FIFO, weighted average cost, etc.) chosen be applied
consistently each year.