Table of Contents
The principles can be classified mainly into three categories:
- Basic assumption or concepts
- Basic principle
- Modifying Principles
Basic assumption or concepts
These assumptions provide a foundation for accounting process.No enterprises can prepare its financial statement without considering these basic assumptions or concepts. On the basis of this basic assumption, the accounting profession has developed principles that guide how the transaction should be recorded and reported. Following may be treated as basic assumption or concepts.
Business entity assumption: According to this assumption, the accounting for a business or organization is kept separate from the personal affairs of its owner, or from any other business or organization. This means that the owner of a business should not place any personal assets on the business balance sheet. The balance sheet of the business must reflect the financial position of the business alone. Also, when transactions of the business are recorded, any personal expenditures of the owner are charged to the owner and are not allowed to affect the operating results of the business.
Money measurement assumption: Only those transaction and events are recorded in accountancy which is capable of being expressed in terms of money.
Going concern concept: As per this assumption, it is assumed that the business will continue to exist for a long period in the future. The transaction is recorded in the books of the business on the assumption that it is a continuing enterprise. It is on this assumption that we recorded fixed assets at their original cost and depreciation is charged on their assets without reference to their market value.
Basic principle
On the basis of the assumption discussed above, certain principles have been developed that guide how the transaction should be recorded and reported. These basic accounting principles are as follows
Duality Principle: According to this principles, every business transaction is recorded as having a dual aspect, in other words, each affects at least two accounts. If one account is debited, any other account must be credited.The system of recording transaction based on this principle is called a ‘’Double entry system.’’
Assets=Liabilities +Capital
Verifiability and objectivity of evidence principle: The principle means that all accounting transaction that are recorded in the books of account should be evidenced and supported by business document are cash memos, invoice, vouchers etc
Historical cost Principles: According to this principles an asset is ordinarily recorded in the books of account at the price at which it was acquired.
Principle of full discloser: The principle requires that all significant information relating to the economic affairs of the enterprise should be complete disclosed.
Modifying Principles
There are certain accounting principles which can be slightly modified by different accountant according to the situation and requirements of the business. This is done in order to make the financial statement more relevant and reliable. These principles are as follows:
- Principle of Timeliness: The principle requires that the financial statement should be prepared quickly at the end of the accounting period and made external users at the earliest possible time.
- Principle of Materiality: This principle is an exception to the principles of full discloser. As such it is termed as modifying principles. According to these principles, items having an insignificant effect or being irrelevant to the users need not be disclosed. These unimportant items are either left out or merged with other items, otherwise accounting statement will be unnecessarily overburdened.
- Principle of consistency: This principle states that accounting principle and methods should remain consistent from one year to another. These should not be changed from year to year.
- Principle of conservatism: According to this principle, all anticipated losses should be recorded in the books of accounts, but all anticipated or unrealized gains should be ignored.