ACCOUNTING

PRINCIPLES
Theory base of accounting consists of principles, concepts, convention,
rules and guidelines developed over a period of time to bring uniformity
and consistency to the process of accounting in order to enhance its
utility to various users of accounting information. In addition, accounting
standards issued by The Institute of Chartered Accountants of India
(ICAI) also constitute the theory base of accounting.
Meaning of Accounting
Principles
 Accounting statements which discloses the profitability and solvency
of the business to various parties should be prepared according to
some standard language and set rules called Generally Accepted
Accounting Principles (GAAP).
Need of Accounting Principles:

 The comparability of financial information is required to see how a

firm has performed as compared to the other firms and how it has
performed as compared to the previous years. The information
provided by the financial statements is based on some set rules
known as policies, principles and conventions. These set of rules
called GAAP bring uniformity and consistency to the process of
accounting and enhance its utility to different users of accounting
information.
Kinds of Accounting Principles

 i)Accounting Concepts or Assumption

 ii)Accounting Principles
 i)Accounting Concepts or Assumptions: In order to make the
accounting language convey the same meaning to all people and to
make it more meaningful, most of the accountants have agreed on a
number of concepts which are usually followed for preparing the
financial statements. These concepts guides how transactions should
be recorded and reported. Followings may be treated as basic
concepts or assumptions:-
Accounting Concepts or
Assumptions
 1.Going Concern Concept:
 It is assumed that the business will continue to exist for a long period
in the future. The transactions are recorded in the books of the
business on the assumptions that it is a continuing enterprises.
 Because of this concept , outside parties enter into long term contract
with the enterprises, give loans and purchase the debentures and
share of the enterprises
 2.Consistency Concept:
 It states that accounting principles and methods should remain
consistent from one year to another. These should not be changed
from year to year, in order to enable the management to compare the
Profit and Loss Account and Balance Sheet of the different periods
and draw important conclusions about the working of the enterprise.
 3.Accrual Concept:
 In accrual concept revenue is recorded when sales are made or
services are rendered and it is immaterial whether cash is received or
not. Expenses are recorded in the accounting period in which they
assist in earning the revenues whether the cash is paid for them or
not.To ascertain true profit and loss for an accounting period and to
show the true financial position of the enterprise all expenses and
income relating to the accounting period are recorded whether actual
cash has been paid or received or not.
ii)Accounting Principles:

 1.Business Entity Principle: According to this principle, business is

treated as a separate unit and distinct from its owners, creditors,
partners and others.The owner of a business is always considered as
distinct and separate from the business he owns.
 2. Money Measurement principle: Only those transactions and
events are recorded in accounting which are capable of being
expressed in terms of money.
 3.Accounting Period Principle: As the business is intended to
continue indefinitely for a long period, the true results of the business
operation can be ascertained only when the business is completely
wound up. The entire life of the firm is divided into time-intervals for
the measurement of the profits of the business. Twelve months period
is usually adopted for this purpose.
 4.Principle of Full Disclosure: All significant information relating to
the economic affairs of the enterprise should be completely disclosed.
In other words, there should be sufficient disclosure of information
which is of material interest to the users of the financial statement
such as proprietors, present and potential creditors, investors and
others.
 5.Principle of Materiality: According to this principle, items having
an insignificant effect or being irrelevant to the users not to be
disclosed. These unimportant items are either left out or merged with
other items, otherwise accounting statements will be unnecessarily
overburdened.
 American Accounting Association(AAA) defines the term
materiality as under:
 “An item should be regarded as material if there is reason to believe
that knowledge of it would influence decision of informed investor.”
 6.Principle of Conservatism or Prudence: According to this
principle, all anticipated losses should be recorded in the books of
accounts, but all anticipated or unrealized gains should be ignored.
Provision is made for all known liabilities and losses even though the
amount cannot be determined with certainty.
 7. Cost Principle or Historical Cost Principle: According to this
principle, an asset is ordinarily recorded in the book of accounts at
the price at which it was acquired.Since the acquisition cost relates to
the past, it is referred to as historical cost.This cost is the basis of
valuation of the assets in the financial statements.
 8.Matching Principle: In determining the net profit from business
operations, all costs which are applicable to revenue of the period
should be charged against that revenue. Accordingly, for matching
costs with revenue , first revenue should be recognized and then
costs incurred for generating that revenue should be recognized.
 9.Dual Aspect Principle: According to this principle, every business
transaction is recorded as having dual aspect. In other words, every
transaction affects atleast two accounts. If one is debited, any other
account must be credited.The system of recording transaction based
on this principle is called as ‘Double Entry System’.
 Assets= Liabilities+Capital