Principle Of Accounting

Principle Of Accounting

Principle of Accounting:

Accounting principles are the laws and procedures that organizations must obey when presenting financial reports. It is important for all businesses to have basic accounting principles in mind to ensure the most accurate financial position.

In the United States, the Financial Accounting Standards Board (FASB) issued a set of the fundamental principle known as Generally Accepted Accounting Principles (GAAP). Following are some basic Accounting principles:

Business Entity Principle:

Under this principle or concept, it is essential that a business organisation is separate and distinct from its owner or proprietor.

Unit of Measurement Principle:

In the accounting process, money is used to express facts and all relevant details about the business effect of inflation on the value of money is not taken into consideration.

Going concern Principle:

In almost all cases the counting system will create the values on the assumption that the business will continue operating for an indefinite period of time.

Objective Evidence Principle:

All accounting transactions must be properly supported by objective evidence i.e. Purchase invoice bank statements and various kinds of vouchers. However, in certain cases, we may have to depend upon judgement and estimates for example provision for bad debts depreciation on fixed assets etc.

Cost Principle:

Under this principle or concept, all assets acquired by the business are to be recorded at a cost the market value at any moment of time is to be ignored.

Dual Aspect Principle:

This represents the concept of double-entry bookkeeping. every transaction enters into by a firm has two aspects that are debit and credit. According to the dual aspect concept at any time the total assets of a business are equal to its total liabilities.

Assets = Capital + Liabilities

Accrual Principle:

According to this concept, revenues are recognised as they are earned whether money is received or not, and the cost is recognised as they are incurred whether money is paid or not.

Accounting Convention:

Following are the three accounting conventions generally used to interpret the above-mentioned accounting principles:

1. Conservation (Prudence)

This required taking into account all possible losses but ignore all possible profits (unrealised profits) which may arise due to business activity in the current year.

2. Consistency:

While certain alternatives are equally acceptable, one suitable alternative should be carefully selected and then applied consistently year after year.

3. Materiality:

This means that size and extent of any amount will influence its treatment financial statements should separately disclose items that are significant enough to affect evaluation or decisions. But if the item or event is material, it may not be disclosed.

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