ACCOUNTING PRINCIPLES

Accounting principles can be subdivided into

two categories:

 Accounting Concepts; and

 Accounting Conventions.
 Accounting Concepts
 Accounting Conventions
The term ‘concept’ is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based. The term ‘convention’
is used to signify customs and traditions as
a guide to the presentation of accounting
statements.
Accounting Concepts
• Business Entity Concept
• Money Measurement Concept
• Cost Concept
• Going Concern Concept
• Dual Aspect Concept
• Realization Concept
• Accounting Period Concept
Accounting Conventions
• Convention of Consistency
• Convention of Disclosure
• Convention of Conservation
Accounting Concepts
The term ‘concept’ is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based.
Business is treated as a separate entity or
unit apart from its owner and others. All the
transactions of the business are recorded in
the books of business from the point of view
of the business as an entity and even the
owner is treated as a creditor to the extent
of his/her capital.
In accounting, we record only those
transactions which are expressed in terms
of money. In other words, a fact which can
not be expressed in monetary terms, is not
recorded in the books of accounts.
In accounting, life of the business is
perpetual but still it has to report the
results of activity undertaken in one year. So
final accounts are prepared for the
accounting period which is 12 months
period and normally it is the Financial Year (
1st April to 31st March).
Transactions are entered in the books of
accounts at the amount actually involved.
Suppose a company purchases a car for
Rs.1,50,000/- the real value of which is
Rs.2,00,000/-, the purchase will be recorded
as Rs.1,50,000/- and not any more. This is
one of the most important concept and it
prevents arbitrary values being put on
transactions.
It is persuaded that the business will exists
for a long time and transactions are
recorded from this point of view. The entity
is assumed to remain in operation
sufficiently long to carry out its objects and
plans.
Each transaction has two aspects, that is,
the receiving benefit by one party and the
giving benefit by the other. This principle is
the core of accountancy.
For example, the proprietor of a business
starts his business with Cash Rs.1,00,000/-,
Machinery of Rs.50,000/- and Building of
Rs.30,000/-, then this fact is recorded at
two places. That is Assets account (Cash,
Machinery & Building) and Capital accounts.
The capital of the business is equal to the
assets of the business.
Thus, the dual aspect can be expressed as
under

Capital + Liabilities = Assets

or
Capital = Assets – Liabilities
This concept emphasizes that profits should
be considered only when realized .
Accounting should take into consideration
profits only when the same have been
realized.
Matching concept requires that expenses
should be matched to the revenues of the
appropriate accounting period. So we must
determine the revenue earned during a
particular accounting period and the
expenses incurred to earn those revenues.
Accrual is concerned with expected future
cash receipts and payments : Accounting
attempts to recognize non-cash events and
circumstances as they occur.
Examples are – purchase and sales of goods
on credit ,wages and salaries outstanding.
This concept presumes that the purchasing
power of monetary unit ,say, rupee, remains
the same throughout , thus ignoring the
effect of rising or falling purchasing power
of monetary unit due to deflation or
inflation.
Accounting Conventions

The term ‘convention’ is used to signify

customs and traditions as a guide to the
presentation of accounting statements.
In order to enable the management to draw
important conclusions regarding the working
of the company over a few years, it is
essential that accounting practices and
methods remain unchanged from one
accounting period to another. The
comparison of one accounting period with
that of another is possible only when the
convention of consistency is followed.
This principle implies that accounts must be
honestly prepared and all material
information must be disclosed therein. The
contents of Balance Sheet and Profit and
Loss Account are prescribed by law. These
are designed to make disclosure of all
material facts compulsory.
Financial statements are always drawn up
on rather a conservative basis. That is,
showing a position better than what it is,
not permitted. It is also not proper to show
a position worse than what it is. In other
words, secret reserves are not permitted.
Financial statements are always drawn up
on rather a conservative basis. That is,
showing a position better than what it is,
not permitted. It is also not proper to show
a position worse than what it is. In other
words, secret reserves are not permitted.
Financial statements are always drawn up
on rather a conservative basis. That is,
showing a position better than what it is,
not permitted. It is also not proper to show
a position worse than what it is. In other
words, secret reserves are not permitted.