Accounting Principles and

Concepts
Accounting Principles,
Conventions, Concepts
The rules and conventions of accounting
are commonly referred to as principles.
The double entry system of accounting
is based on set of principles which are
called Generally Accepted Accounting
Principles (GAAP).
Accounting Principles Board (USA)
describes accounting principles as
follows:


Generally accepted accounting
principles incorporate the consensus
at a particular time as to which
economic resources and obligations
should be recorded as assets and
liabilities by financial accounting,
which changes in assets and
liabilities should be recorded, when
these changes are to be recorded,
how the assets and the liabilities and
changes in them should be
measured, what information should
be disclosed and which financial
statement should be prepared.
The general acceptance of an
accounting principles usually
depends on three criteria:

Relevance
Objectivity
Feasibility

Accounting Principles are built
on a foundation of a few basic
concepts.

Basic Concepts Underlying
the Balance Sheet
1. The Entity concept
2. Money Measurement Concept
3. Going Concern Concept
4. Cost Concept

Concept Underlying the Income
Statement
1. Accounting Period Concept
2. The Conservatism Concept
There are three principles or rules
which directly stand from this
concept:

The accountants should not
anticipate income and should
provide all possible losses.
Faced with a choice between two
methods of valuing an asset the
accountant should choose a
method which leads to the lesser
value.
In case of valuation of current
assets the accountant should
accept the lower of the historical
cost and net realisable value.

3. The Realization Concept

4. The Matching Concept

5. The Consistency Concept

6. The Materiality Concept

7. Accrual Concept

8. Duality or Accounting Equivalence
Concept

In business, as elsewhere, funds can be
raised in any of the following ways:
Additional Capital (increases owners
equity)
Additional Loans (increases outside
liability)
Earning Revenue (increases owners
equity)
Making Profits (increases owners
equity)
Disposing or Reducing some of the
Assets (increases assets)

Thus, all increases in liabilities
(including owners equity) and
reduction in assets represent
sources of funds.

Similarly, the funds thus raised, may be put to any of the
following uses:

1.Purchasing of assets (increases assets)

2.Incurring Operational expenses (decrease owners
equity)

3.Discharging Earlier Liabilities (decreases liability)

4. Keeping Idle funds so that cash balance increases
(increases asset)

5. Suffering losses (decreases owners equity)

Thus, all increases in assets and
decreases in liabilities (including
owners equity) are uses of funds.

Thus, the accounting equivalence
concept implies that:

Sources of Funds = Uses of Funds
Or
Owners Equity + Outside Liability = Assets

Symbols for Sources and Uses of
Funds

Increase Decrease
Liability, Revenue
and Profit
CR =
Source
DR = Use
Asset, Expense
and Loss
DR =
Use
CR =
Source
A Conceptual Framework of
Financial Accounting
Integrated into
Eg. Subject: Financial Accounting
Principle: Double Entry System
For Cash transactions For Credit transaction
Cash Book Journal
Ledger
Output: Trial Balance
Profit and Loss
Account
Income and
Expenditure
Profit or Loss
transferred to
Balance Sheet
Balance Sheet
Assets and
Liabilities