Accounting Principles

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 Meaning of Accounting Principles
n Accounting principles refer to the rules and actions
adopted by the accountants globally for recording
accounting transactions.
n These are classified into two categories:
n Accounting concepts
n Accounting conventions

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 Accounting Concepts
n Accounting concepts include the assumptions and
conditions on which the science of accounting is
based.
n These are also known as accounting standards.
n Important accounting concepts are:
n Separate entity concept
n Going concern concept
n Money measurement concept
n Cost concept
n Dual aspect concept
n Accounting period concept
n Realization concept
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 Business Entity Concept
The concept of business entity assumes that business has a
distinct and separate entity from its owners. It means that
for the purposes of accounting, the business and its
owners are to be treated as two separate entities.

Keeping this in view, when a person brings in some money

as capital into his business, in accounting records, it is
treated as liability of the business to the owner.

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 Money Measurement Concept
n The concept of money measurement states that only those
transactions and happenings in an organisation which can be
expressed in terms of money such as sale of goods or payment
of expenses or receipt of income, etc. are to be recorded in the
book of accounts. All such transactions or happenings which
can not be expressed in monetary terms,
n for example, the appointment of a manager, capabilities of its
human resources or creativity of its research department

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 Going Concern Concept
The concept of going concern assumes that a
business firm would continue to carry out its
operations indefinitely, i.e. for a fairly long period
of time and
would not be liquidated in the foreseeable future.

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 Accounting Period Concept
Accounting period refers to the span of time at the end of
which the financial statements of an enterprise are prepared,
to know whether it has earned profits or incurred losses
during that period and what exactly is the position of its
assets and liabilities at the end of that period. Such
information is required by different user at regular interval
for various purposes, as no firm can wait for long to know it
financial results as various decisions are to be taken at
regular intervals on the basis of such information.

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 Cost Concept
n The cost concept requires that all assets are
recorded in the book of accounts at their
purchase price, which includes cost of
acquisition, transportation, installation and
making the asset ready to use
n

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 Dual Aspect Concept
n Dual aspect is the foundation or basic principle
of accounting. It provides the very basis for
recording business transactions into the book
of accounts. This concept states that every
transaction has a dual or two-fold effect and
should therefore be recorded at two places.

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 Revenue Recognition
(Realisation) Concept
n The concept of revenue recognition requires
that the revenue for a business transaction
should be included in the accounting records
only when it is realised.

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 Matching Concept
n The process of ascertaining the amount of profit
earned or the loss incurred during a particular
period involves deduction of related expenses from
the revenue earned during that period. The
matching concept emphasizes exactly on this
aspect.
n It states that expenses incurred in an accounting
period should be matched with revenues during
that period.
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 Full Disclosure Concept
n The financial statements makes a full, fair and adequate
disclosure of all information which is relevant for taking
financial decisions
n The principle of full disclosure requires that all material and
relevant facts concerning financial performance of an
enterprise must be fully and completely disclosed in the
financial statements and their accompanying footnotes.
n

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 Consistency Concept
n The accounting information provided by the
financial statements would be useful in
drawing conclusions regarding the working
of an enterprise only when it allows
comparisons over a period of time as well as
with the working of other enterprises.

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 Conservatism Concept
n The concept of conservatism (also called
‘prudence’) provides guidance for recording
transactions in the book of accounts and is
based on the policy of playing safe

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 Materiality Concept
n The concept of materiality requires that accounting
should focus on material facts
n In certain cases, when the amount involved is very
small, strict adherence to accounting principles is not
required. For example, stock of erasers, pencils,
scales, etc. are not shown as assets, whatever amount
of stationery is bought in an accounting period is
treated as the expense of that period, whether
consumed or not.

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 Objectivity Concept
n The concept of objectivity requires that accounting
transaction should be recorded in an objective manner,
free from the bias of accountants and others
n This can be possible when each of the transaction is
supported by verifiably documents or vouchers. For
example, the transaction for the purchase of materials
may be supported by the cash receipt for the money paid

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 Accounting Conventions
n Accounting conventions include the customs
and traditions that assists the accountants
in preparing accounting statements.
n Important accounting conventions are:
n Convention of conservatism
n Convention of full disclosure
n Convention of consistency
n Convention of materiality

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 Institute of Chartered Accountants
of India
n Council of Institute of Chartered Accountants issues
from time-to-time preface to the statements of
accounting standards that defines the various
aspects of accounting standards.
n It established an Accounting Standards Board
(ASB) on 22nd April, 1977.
n The function of ASB is to formulate accounting
standards, which are then established by the
Council of Institute of Chartered Accountants.

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 Systems of Book-Keeping
n Two types of systems of book-keeping are:
n Single entry system: It is used to record only
cash and personal accounts.
n Double entry system: It is used to record each
transaction under two different accounts. It
is more reliable and efficient than the
single entry system.
n

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 Preface to the Statements of
Accounting Standards
n It defines standards related to following
features:
n Formation of accounting standards board
n Objectives and functions of the Accounting
Standards Board
n General purpose financial statements
n Scope of accounting standards
n Procedure for issuing an accounting standard
n Compliance with the accounting standards
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Difference Between Double Entry
and Single Entry Systems

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 Accounting Equation
n It is defined as:
Assets = Equities
Or, Assets = Liabilities + Capital
n Assets refers to the properties owned by a business
n Equities refers to the rights to the properties.
n Liabilities refers to the equity of creditors that
represent debts of the business.
n Capital refers to the equity of owners of the
business.

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 Systems of Accounting
n Two basic systems of accounting are:
n Cash system of accounting: In this system, entries are
made only when cash is received or paid. It is followed
by the Government of various countries.
n Mercantile system of accounting: In this system, entries
are made for amount that is due for payment or receipt.
It is followed by the industrial and commercial firms.
n Mercantile system is preferred over cash system
because it considers the effect of transactions and
reflects the financial position of the company.

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