Basic principles of accounting are essentially, the generated decision rules which govern the development of accounting techniques. These Priniples guide how transaction should be recorded
There are eight types of Concepts Principle, which are following
1.Business Entity Concepts
2.Money Measurement Concepts
3.Perioditicty Concepts
4.Dual Aspects Concepts
5.Going Concern Concepts
6.Accrual Concepts
7.Matching Concepts
8.Cost Concepts
Accounting Conventions
1. Convention of Full Disclosure
2. Convention of Consistency
3. Convention of Conservatism
4. Convention of ateriality
Concepts
1. Business Entity Concepts- Acoording to this concept, business is treated as a unit separate and distinct from its owners, creditors, managers and others. In other words the owner of a business is always considered as distinct and seperate from the business owns. Because of the concept of seperate entity, the proprietor house, his personal investment in seurities, his personal car and personal income and expenditure are kept separate from the accounts of the business entity.
2. Money Measurement Concepts- Only those transaction and events are recorded in accounting ware capableof being expresses in terms of money. for example, accounting does not record a quarrel between the production manager and sales manager. so these event cannot be expressed in money terms and thus are not recorded in the books.
3. Perioditity Concepts- As the business is intended to continue for a long period, the result of the business operation can be ascertained only when the business is completely wound up.The users the financial statement need to know the result of business at time. Thus the entire life of the firm is divided into time intervals for the measurement of the profits of the business.
4. Dual Aspects- According to this concept every business transaction is recorded as having a dual aspect. In other words, every transaction affects atleast two accounts. If one account is debited, then other account must be credited. The system of recording transaction based on this concept is called as Double Entry System. It is because of this principle that the two side of the Balance Sheet are always equal and the following accouting equation are
Assets = Liabilities plus Capital
Capital= Assets minus Liabilities
5. Going Concern Concept- As per this concept it is assumed that the business will continue to exist for a long period in the future. The transaction are recorded in the books of the business on the assumption that it is a continue enterprise.It is also because of the going concern concept that outside parties enter into long term contract with the enterprise, give loans and purhase the debentures and shares of the entreprise. For example, if Machinery purchased for 10 years it means it gives the net profit or loss for next 10 year for an entreprise.
6. Accrual Concepts-In acounting accrual basis is used for recording of transation. It provides more appropriate information about the performance of business enterprises as compared to cash basis. Accrual concepts applies equally to revenue and expenses. In accrual concept revenue is recorded when sales are made or services are rendered and it is immaterial whether cash is received or not.
7. Matching concepts-This concepts is very important for correct determination of net profit. According to this concept in determining the net profit from business operations, all cost which are applicable to revenue of the period should be charged against that revenue. According for matching costs with revenue firm revenues should be recognised and then costs incurred for generating that revenue should be recognised. For example when an item of revenue is included in the profit and loss account all expenses incurred on it, whether paid or not should be shown as expenses in the profit and loss account. On the basis of this principle outstanding expenses, though not paid in cash ar shown in the profit and loss account.
8. Cost Concept- According to this concept an asset is ordinarily recorded in the books of account at the prie at which it was acquired. This cost becomes the basis of all subsequent accounting for the asset. since the acquisition cost relates to the past, it is referred to as historical cost. This cost is the basis of valuiation of the asset in the financial asset. for example if building purchased for Rs 5,00,000 it would be recorded in the books at this figure.
Convention- An accounting convention may be defined as a custom or generally accepted practices which is adopted either by general agreement or common consent among accountants. Accounting Conventions differ from concepts in respect to the following-
i. Accounting concepts are established by law while accounting convention are guidelines based upon custom or general agreement.
ii. There is no role of personal judgment or individual in the adoption of accounting concepts whereas they may play a crucial role in following accounting conventions
iii. There is uniform adoption of accounting concepts in different enterprises while it may not be so in case of accounting conventions
Following are the main accounting convention-
1. Convention of full disclosure- This principle requires that all significant information relating to the economic affairs of the enterprise should be completely disclosed. In other words there should be a sufficient disclosure of information which is of material interest to the users of the financial statement such as proprietors, present and potential creditors, investors and others.
2. Contingent Liabilities- For example a claim of very big sum pending in a court of law against the enterprises should be brought to the notice of the users of the financial statement otherwise the statement would be misleading.
If there is a change in the method of valuation of stock, or for providing depreciation or in making provision for doubtful debts, it should be disclosed in the balance sheet by way of a footnote.
3. Convention of Consistency- This convention states that accounting principles and method should remain consistent from year to year to another. These should not be changed from year to year in order to enable the management to compare the profit and loss account and balance sheet. Of the different period and draw important conclusions about the working of the enterprise. If a firm adopts different accounting principles in two accounting period, the profit of current period will not be comparable with the profit of the preceding period. For example a firm can choose any one of the several methods of depreciation like SLM method and WWDV method, but it is expected that if one method once choose then never change year after year
4. Convention of conservatism- According to this convention all anticipated losses should be recorded in the books of account, but all anticipated or unrealized gains should be ignored. In other words Conservatism is the policy of playing safe. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty. For example closing stock is valued at cost price or realizable value whichever less is. Provision for doubtful debts is created in anticipation of actual bad debts
There are eight types of Concepts Principle, which are following
1.Business Entity Concepts
2.Money Measurement Concepts
3.Perioditicty Concepts
4.Dual Aspects Concepts
5.Going Concern Concepts
6.Accrual Concepts
7.Matching Concepts
8.Cost Concepts
Accounting Conventions
1. Convention of Full Disclosure
2. Convention of Consistency
3. Convention of Conservatism
4. Convention of ateriality
Concepts
1. Business Entity Concepts- Acoording to this concept, business is treated as a unit separate and distinct from its owners, creditors, managers and others. In other words the owner of a business is always considered as distinct and seperate from the business owns. Because of the concept of seperate entity, the proprietor house, his personal investment in seurities, his personal car and personal income and expenditure are kept separate from the accounts of the business entity.
2. Money Measurement Concepts- Only those transaction and events are recorded in accounting ware capableof being expresses in terms of money. for example, accounting does not record a quarrel between the production manager and sales manager. so these event cannot be expressed in money terms and thus are not recorded in the books.
3. Perioditity Concepts- As the business is intended to continue for a long period, the result of the business operation can be ascertained only when the business is completely wound up.The users the financial statement need to know the result of business at time. Thus the entire life of the firm is divided into time intervals for the measurement of the profits of the business.
4. Dual Aspects- According to this concept every business transaction is recorded as having a dual aspect. In other words, every transaction affects atleast two accounts. If one account is debited, then other account must be credited. The system of recording transaction based on this concept is called as Double Entry System. It is because of this principle that the two side of the Balance Sheet are always equal and the following accouting equation are
Assets = Liabilities plus Capital
Capital= Assets minus Liabilities
5. Going Concern Concept- As per this concept it is assumed that the business will continue to exist for a long period in the future. The transaction are recorded in the books of the business on the assumption that it is a continue enterprise.It is also because of the going concern concept that outside parties enter into long term contract with the enterprise, give loans and purhase the debentures and shares of the entreprise. For example, if Machinery purchased for 10 years it means it gives the net profit or loss for next 10 year for an entreprise.
6. Accrual Concepts-In acounting accrual basis is used for recording of transation. It provides more appropriate information about the performance of business enterprises as compared to cash basis. Accrual concepts applies equally to revenue and expenses. In accrual concept revenue is recorded when sales are made or services are rendered and it is immaterial whether cash is received or not.
7. Matching concepts-This concepts is very important for correct determination of net profit. According to this concept in determining the net profit from business operations, all cost which are applicable to revenue of the period should be charged against that revenue. According for matching costs with revenue firm revenues should be recognised and then costs incurred for generating that revenue should be recognised. For example when an item of revenue is included in the profit and loss account all expenses incurred on it, whether paid or not should be shown as expenses in the profit and loss account. On the basis of this principle outstanding expenses, though not paid in cash ar shown in the profit and loss account.
8. Cost Concept- According to this concept an asset is ordinarily recorded in the books of account at the prie at which it was acquired. This cost becomes the basis of all subsequent accounting for the asset. since the acquisition cost relates to the past, it is referred to as historical cost. This cost is the basis of valuiation of the asset in the financial asset. for example if building purchased for Rs 5,00,000 it would be recorded in the books at this figure.
Convention- An accounting convention may be defined as a custom or generally accepted practices which is adopted either by general agreement or common consent among accountants. Accounting Conventions differ from concepts in respect to the following-
i. Accounting concepts are established by law while accounting convention are guidelines based upon custom or general agreement.
ii. There is no role of personal judgment or individual in the adoption of accounting concepts whereas they may play a crucial role in following accounting conventions
iii. There is uniform adoption of accounting concepts in different enterprises while it may not be so in case of accounting conventions
Following are the main accounting convention-
1. Convention of full disclosure- This principle requires that all significant information relating to the economic affairs of the enterprise should be completely disclosed. In other words there should be a sufficient disclosure of information which is of material interest to the users of the financial statement such as proprietors, present and potential creditors, investors and others.
2. Contingent Liabilities- For example a claim of very big sum pending in a court of law against the enterprises should be brought to the notice of the users of the financial statement otherwise the statement would be misleading.
If there is a change in the method of valuation of stock, or for providing depreciation or in making provision for doubtful debts, it should be disclosed in the balance sheet by way of a footnote.
3. Convention of Consistency- This convention states that accounting principles and method should remain consistent from year to year to another. These should not be changed from year to year in order to enable the management to compare the profit and loss account and balance sheet. Of the different period and draw important conclusions about the working of the enterprise. If a firm adopts different accounting principles in two accounting period, the profit of current period will not be comparable with the profit of the preceding period. For example a firm can choose any one of the several methods of depreciation like SLM method and WWDV method, but it is expected that if one method once choose then never change year after year
4. Convention of conservatism- According to this convention all anticipated losses should be recorded in the books of account, but all anticipated or unrealized gains should be ignored. In other words Conservatism is the policy of playing safe. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty. For example closing stock is valued at cost price or realizable value whichever less is. Provision for doubtful debts is created in anticipation of actual bad debts
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