Accounting principles refers to fundamental belief or a general truth which once established does not change. They are usually the Accounting concepts and conventions which have been adopted as a general guide by the accounting profession. These principles are also called Accounting Standards.
Accounting principles are classified into two categories:
- Accounting Concepts
- Accounting Conventions
Accounting Concepts may be considered as postulates i.e. basic assumptions or conditions upon which the science of accounting is based. Any abstract idea serving a systematized function is regarded as concepts. There is no authoritative list of these concepts but most of the following have fairly general support.
Accounting Conventions are the circumstances or traditions which guide the accountants while preparing the accounting statements.
List of various accounting concepts:
- Business Entity Concept: A business entity is separate and distinct from the owner. The owners personal transactions are kept separate from the business transactions. This is because if the private affairs of the owners are mixed with business affairs then the true picture of the business cannot be shown.
- Money Measurement Concept: Only those transactions recorded in accounting books which has monetary value. For Example a fight between sales and finance manager is not to be recorded in books since it has no monetary value.
- Going Concern Concept: It is assumed that the business will go on for a indefinite period of time. Keeping in this concept in mind, all business transactions are accounted. For example Fixed assets are shown at cost in balance sheet since it is assumed that business will run for indefinite time and there is no intentions of selling them in short period of time.
- Cost Concept: According to this concept all are recorded in books at purchase price i.e. cost. This cost may further increased or decreased.
- Dual Aspect Concept: Every accounting transaction has two effects, one is debit and other is credit.
- Accounting Period Concept: The books of accounts are maintained for a specific period. It may be a month, quarter or year. Based on this period the income & Expenses are accounted.
- Matching Concept: The profit of a period is determined by matching the expenses and incomes of that period. In simple words income & expenses which are not belong to the reporting that period are not recognized as expense & income of that period.
- Realization Concept: Revenue is recognized when it is which it is realized or there is possibility of realizing it. When the ownership and risk & reward related to goods has been transferred.
- Accrual Concept: Expenses are recognized in the period in which they help to generate revenue of that period. And income is recognized when it is realized, when sale/ service is complete.
- Objective Evidence Concept: Every transaction recorded must have some reliable, trustworthy and verifiable evidence.
The Various accounting conventions:
- Convention of consistency: All accounting rules, concepts and practices must be consistently followed.
- Convention of full disclosure: All monetary transactions must be fully disclosed, whether by accounting entries or may be by notes
- Convention of Conservatism (prudence): It is the degree of caution in the exercise of judgement needed in making estimates required under condition of uncertainty. Accordingly profits are not recognized on the basis of anticipations.
- Concept of materiality: Only material transactions which could effect the economic decision of a end user of financial statement are recorded.