Meaning Of Accounting Principles Didn’t understand?

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Accounting Principles are the rules adopted by accountants universally while

recording accounting transactions.
These rules are usually called GAAP (Generally Accepted Accounting Principles).

Nature of Accounting Principle Didn’t understand? Watch

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Accounting Concepts-Accounting Concepts are the basic assumptions within

which accounting operates. They are generally accepted accounting rules.
Accounting Conventions-Accounting Conventions are the outcome of
accounting practices being followed by the enterprises over a period of
time. Conventions may undergo a change with time to bring about
improvement in the quality of accounting information.

Needs Of Accounting Principle Didn’t understand? Watch

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In order to make the accounting information meaningful to its internal and

external users, it is significant that such information is reliable as well as
comparable.
(GAAP) bring uniformity and consistency to the process of accounting and
enhance its utility to different users of accounting information.

Fundamental Accounting Assumptions Didn’t understand? Watch

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As per Accounting Standard (AS-1), issued by the Institute of Chartered
Accountants of India, there are three fundamental (or basic) accounting
assumptions:

Going Concern Accrual Assumption

Consistency Assumption

Going Concern Assumption-Business will continue for a foreseeable future

and there is no intention to close the business.It is because of this concept
that a distinction is made between capital expenditure, i.e., expenditure that
will give benefit for a long period and revenue expenditure, i.e., one whose
benefit will be consumed or exhausted within the accounting period.On the
basis of this concept, fixed assets are recorded at their original cost and
they are depreciated in a systematic manner over their expected useful life.
 Accrual Assumption-Transactions are recorded when they are entered into
whether amount is exchanged or not.Profit is regarded as earned at the
time the goods or services are sold i.e., the legal title is passed to the
customer, who in turn, has an obligation to pay for them.Similarly, expenses
is regarded as incurred when the goods or services are purchased or availed
and an obligation to pay for them is assumed.
Consistency Assumption-Accounting practices and principles once applied
shall be applied year after year to meet the qualitative characteristic. The
concept helps in better understanding of accounting information and makes
it comparable with that of previous years.The accounting practice may be
changed if the law or Accounting Standard requires it or the change will
result in more meaningful presentation.

Other Accounting Principles Didn’t understand? Watch

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Business Entity Concept-Business is considered to be separate from its

owners.Business transactions are recorded in the books of account
from the business point of view and not from that of the owners.
Owner's account with the business is credited with the capital
introduced and profit earned during the year, etc., and debited by the
drawings made.
Money Measurement Concept-Transactions and events that can be
measured in money are recorded.
Accounting Period Concept- Life of the business is broken into smaller
periods of 12 months known as Accounting periods. Users of Financial
Statements, especially the management and banks, require information
from the accounts at regular intervals so that decisions can be taken at
the appropriate time.Similarly, Government has to assess tax dues from
the enterprise. In view of the above, the life of the enterprise is
broken into smaller periods (usually one year) which is termed as the
'Accounting Period'.
Full Disclosure Principle-Disclosures should be made of items required
under law and those items which are material. For example, the reasons
for low sales should be disclosed.
Materiality Principle-An item should be regarded as material if there is
a reason to believe that knowledge of it would influence the decision of
an informed investors.An item may be material for one enterprise but
may not be material from another.
Prudence or Conservatism Principle-It takes into consideration all
anticipated expenses and losses but do not account anticipated incomes
and profits.For example, closing stock is valued at lower of cost or net
realisable value (market value).Making the provision for doubtful debts
and discount on debtors in anticipation of bad debts and discount.
Dual Aspect or Duality Principle-Every transaction entered into has two
aspects 'debit' and 'credit' of equal amount. Accounting equation
demonstrates the fact that for every debit there is an equal credit and vice
versa.The system of Double Entry Book Keeping is based on this concept.
Matching Concept or Matching Principle- Expenses incurred to earn the
revenue should be recognised as expense in the year revenue is recognised.
According to this concept, the expenses for an accounting period are matched
against related revenues, rather than cash received and cash paid. This
concept should be followed while preparing financial statements to have a true
and profitability and financial position of a business firm.
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. This
cost is systematically reduced by charging ‘Depreciation’.The market value of
an asset may change with time but for accounting purposes it is shown in the
books of account at its book value (i.e., cost minus depreciation).
Revenue Recognition Concept- Revenue is considered to have been realised
when a transaction has been entered into and the obligation to receive the
amount is established.
Verifiable Objective Concept-All accounting transactions should be evidence
and supported by business documents. These supporting documents are cash
memo, invoices sales bill, etc.