Accounting Principles

Accounting principles are the rules and regulations which are followed by the accountants at the time of recording the accounting transactions. They help in measuring, recording, and summarizing the transactions. These principles are termed as “Generally Accepted Accounting Principles (GAAP)” which are basic assumptions.

Accounting Concepts

1. Business Entity Concept: In this concept, “Business is treated as separate from the proprietor”. All the Transactions are recorded in the book of Business and not in the books of the proprietor. The proprietor is also treated as a creditor for the Business.

2. Going Concern Concept: This concept relates to the long life of Business. The assumption is that the business will continue to exist for an unlimited period unless it is dissolved due to some reason or another.

3. Money Measurement Concept: In this concept, “Only those transactions are recorded in accounting which can be expressed in terms of money, those transactions which cannot be expressed in terms of money are not recorded in the books of accounting.”

4. Cost Concept: According to this concept, an asset is recorded at its cost in the books of account, i.e., the price, which is paid at the time of acquiring it. In the balance sheet, these assets appear not at cost price every year, but depreciation is deducted, and they appear at the amount, which is cost, less classification.

5. Accounting Period Concept: Every Businessman wants to know the result of his investment and efforts after a certain period. Usually, a one-year period is regarded as ideal for this purpose. This period is called the Accounting Period. It depends on the nature of the business and the object of the proprietor of the business.

6. Dual Aspect Concept: According to this concept, “Every business transaction has two aspects,” one is the receiving benefit aspect, and the other one is the giving benefit aspect. The receiving benefit aspect is termed as “DEBIT”, whereas the giving benefit aspect is termed as “CREDIT”. Therefore, for every debit, there will be a corresponding credit.

7. Matching Cost Concept: According to this concept, “The expenses incurred during an accounting period, e.g., if revenue is recognized on all goods sold during a period, the cost of those goods sold should also be charged to that period.

8. Realization Concept: According to this concept, revenue is recognized when a sale is made. A sale is considered to be made at the point when the property in goods passes to the buyer, and he becomes legally liable to pay.

Accounting Conventions

1. Full Disclosure: According to this convention, accounting reports should disclose fully and fairly the information. They purport to represent. They should be prepared honestly and sufficiently disclose information which is of material interest to proprietors, present and potential creditors, and investors. The Companies Act, 1956 makes it compulsory to provide all the information in the prescribed form.

2. Materiality: Under this convention, the trader records important factors about the commercial activities. In the form of financial statements, if any unimportant information is to be given for the sake of clarity, it will be given as footnotes.

3. Consistency: It means that the accounting method adopted should not be changed from year to year. It means that there should be consistency in the methods or principles followed. Or else the results of a year cannot be conveniently compared with that of another.

4. Conservatism: This convention warns the trader not to take unrealized income into account. That is why the practice of valuing stock at cost or market price, whichever is lower, is in vogue. This is the policy of “playing safe”; it takes into consideration all prospective losses but leaves all prospective profits.