ACCOUNTING PRINCIPLES

ACCOUNTING PRINCIPLES MAY BE DEFINED AS THOSE RULES OF ACTION

ADOPTED BY THE ACCOUNTS UNIVERSALLY WHILE RECORDING
TRANSACTIONS

• THESE PRINCIPLES CAN BE CLASSIFIED INTO TWO CATEGORIES:-

1.ACCOUNTING CONCEPTS
2.ACCOUNTING CONVENTIONS
1.ACCOUNTING CONCEPTS:-
THERE ARE 8 ACCOUNTING CONCEPTS US
FOLLOWS AS:-
1.SEPRATE ENTITY CONCEPT
2.MONEY MEASURMENT CONCEPT
3.GOING CONCERN CONCEPT
4.COST CONCEPT
5.DUAL ASPECT CONCEPT
6.ACCOUNTING PERIOD CONCEPT
7.MATCHING CONCEPT
8.REALISATION CONCEPT
2.ACCOUNTING CONVENTIONS:-
FOLLOWING ARE THE IMPORTANT
ACCOUNTING CONVENTIONS:-
1.CONVENTION OF CONSERVATISM
2.CONVENTION OF CONSISTENCY
3.CONVENTION OF MATERIALITY
4.CONVENTION OF FULL DISCLOSURE
• ACCOUNTING CONCEPTS:-
1.SEPARATE ENTITY:-
BUSINESS IS CONSIDERED TO BE SEPARATE ENTITY
FROM IT’S OWNER.
EX. IN CASE OF A PARTNERSHIP BUSINESS OR SOLE PROPRIETORSHIP
BUSINESS,THOUGH THE PARTNERS OR SOLE PROPRIETOR ARE NOT
CONCIDERED AS SEPARATE ENTITIES IN THE EYES OF LAW,BUT FOR
ACCOUNTING PURPOSES THEY WILL BE CONCIDERED AS SEPARATE
ENTITIES.

2.MONEY MEASURMENT:-
ONLY MONETARY TRANSACTIONS ARE RECORDED
IN ACCOUNTING.TRANSACTIONS THAT CAN NOT BE EXPRESSED IN MONEY
DO NOT FIND PLACE IN BOOKS OF ACCOUNTS.
EX.IF A BUSINESS OWNS RS 10000 OF CASH,600 KG OF RAW
MATERIALS,TWO TRUCKS,1000 SQUARE FEET OF BUILDING SPACE
ETC.THESE AMMOUNTS CANNOT BE ADDED TOGETHER TO PRODUCE A
MEANINGFUL TOTAL OF WHAT THE BUSINESS OWNS.HOWEVER,IF THESE
ITEMS ARE EXPRESSED IN MONETARY TERMS SUCH AS RS.10000 OF
CASH,RS.12000 OF RAW MATERIALS,RS.200000 OF TRUCKS AND RS.50000 OF
BUILDING,ALL SUCH ITEMS CAN BE ADDED AND MUCH MORE
INTELLIGIBLE AND PRECISE ESTIMATE ABOUT THE ASSETS OF THE
BUSINESS WILL BE AVAILABLE.
3.GOING CONCERN:-
IT IS ASSUMED THAT BUSINESS WILL CONTINUE FOR A
FAIRLY LONG PERIOD OF TIME.THE OWNER DOES NOT HAVE ANY
INTENTION OF SHUTTING IT DOWN IN THE NEAR FUTURE.
EX.
4.COST CONCEPT:-
ASSETS ARE ALWAYS SHOWN AT THEIR COST AND NOT
AT THEIR CURRENT MARKET VALUE.
EX.IF ORGANISATION BUYS A PLOT OF LAND FOR RS.50000,THE ASSETS
RECORDED IN THE BOOKS AT 50000,EVEN THE MARKET VALUE OF THE
PLOT IN RS.60000.BUT AFTER ONE YEAR PRICE OF PLOT OF LAND IS
RS.40000,IT WILL ORDINARILY CONTINUE TO BE SHOWN AT RS.50000
5.DUAL ASPECT:-
EVERY BUSINESS TRANSACTION HAS A DUAL EFFECT.
EX.IF A STARTS A BUSINESS WITH A CAPITAL OF RS.10000,THE TWO
ASPECTS OF THE TRANSACTION ARE ONE IS ASSETS OF RS.10000 WHILE ON
THE OTHER HAND THE BUSINESS HAS TO PAY TO THE OWNER A SUM OF
RS.10000,WHICH IS OWNERS CAPITAL OR EQUITY.THEN EXPRESSION CAN
BE SHOWN AS BY FOLLOWING EQUATIONS.
CASH(ASSET) =CAPITAL(EQUITY)
6.ACCOUNTING PERIOD:-
ACCOUNTING MEASURES ACTIVITY FOR A
SPECIFIED INTERVAL OF TIME,USUALLY A YEAR.
EX.IN CASE OF A PARTNERSHIP BUSINESS OR SOLE PROPRIETORSHIP
BUSINESS,THOUG THE PARTNERS OR SOLE PROPRIETOR ARE NOT
CONCIDERED AS SEPARATE ENITITIES IN THE EYES OF LOW,BUT FOR
ACCOUNTING PURPOSE THEY WILL BE CONSIDERED AS SEAPARATE
ENTITIES
7.MATCHING CONCEPTS:-
THE MATCHING PRINCIPLES DICATES THAT
EXPENCES BE MATCHED WITH REVENUES.
EX.IF A SALESMAN IS PAID COMMISION IN JANUARY 2006 FOR SALES
MADE BY HIM IN DECEMBER 2005,THE COMMISION PAID IN JANUARY 2006
IS TAKEN AS THE COST FOR SALES MADE BY HIM IN DECEMBER 2005.THIS
MEANS THAT REVENUES OF DEC.2005 SHOULD BE MATHED WITH THE
COSTS INCURRED FOR EARNING THAT REVENUE IN DEC.2005
8.REALISATION CONCEPTS:-
THE SALE IS CONSIDERED TO HAVE TAKEN
PLACE ONLY WHEN EITHER THE CASH IS RECEIVED OR SOME THIRD
PARTY BECOMES LEGALLY LIABLE TO PAY THE AMOUNT.
EX.IF A PLACE AN ORDER WITH B FOR SUPPLY OF CERTAIN GOODS YET TO
BE MANUFACTURED.AFTER RECEVING THE ORDER,B PURCHASE RAW
MATERIALS PRODUCES THE GOODS AND DILIVERS THEM TO A.A MAKES
PAYMENT ON RECEIPT OF GOODS.IN THIS CASE THE SALE WILL BE
PRESUMED TO HAVE BEEN MADE NOT AT THE TIME OF RECEIPT OF ORDER
FOR THE GOODS BUT AT THE TIME WHEN GOODS ARE DELIVERED TO A.
ACCOUNTING CONVENTIONS:-

1.CONSERVATISM:-
ANTICIPATES NO PROFITS BUT PROVIDE FOR ALL
POSSIBLE LOSSES.THIS PRINCIPLES HAS TWO ASPECTS:
1.RECOGNISE REVENUES ONLY WHEN IT IS CERTAIN.
2.RECOGNISE EXPENCES AS SOON AS THEY ARE REASONABLY POSSIBLE
2.CONSITENCY:-
THE ACCOUNT POLICIES AND METHODS FOLLOWED BY THE
COMPANY SHOULD BE THE SAME EVERY YEAR.

3.MATERIALITY:-
ACCOUNTANTS SHOULD ATTACH IMPORTANCE TO
MATERIAL DETAILS AND IGNORE INSIGNIFICANT DETAILS.
INSIGNIFICANT EVENTS WOULD NOT BE RECORDED IF THE BENEFIT OF
RECORDING THEM DOES NOT JUSTIFY THE COST.
4.FULL DISCLOSURE:-
FINANCIAL REPORTS SHOULD DISCLOSE FULLY AND
FAIRLY ALL THE INFORMATION.THEY SHOULD BE HONESTLY PREPAIRED
AND SUFFICIENTLY DISCLOSE INFORMATION WHICH IS OF MATERIAL
INTEREST TO INVESTORS,CREDITORS,OWNERS ETC