ACCOUNTING

PRINCIPLES
- Name: Aishwarya Parle
- Roll No.: 9030
- Subject: Advance Accounting
(M.com Pat I)
 DEFINITION AND MEANING

• Accounting principles are the rules and guidelines that

companies and other bodies must follow when reporting
financial data.
• Implemented to improve the quality of financial information
reported by companies.
 CHARACTERSTICS OF ACCOUNTING
PRINCIPLES

• Not like exact sciences, like physics, chemistry etc., they are in the
form of guidelines
• Accounting principles are fast developing
• General acceptance of an accounting principle depends on how well it
meets three criteria: relevance, objectivity and feasibility
• Accounting principles can be classified as
a) Accounting Concepts
b) Accounting Conventions
 ACCOUNTING CONCEPTS &
CONVENTIONS
Accounting concepts are the basic assumptions on which accounting operates
whereas
Accounting conventions are guidelines that are followed for preparing financial
statements.
ACCOUNTING CONCEPTS ACCOUNTING CONVENTIONS
Entity Concept Conservatism
Going Concern Concept Full Disclosure
Cost Concept Consistency
Realisation Concept Materiality Convention
Matching Cost with Revenue Concept
Accounting Period Concept
Monetary Unit Concept
Dual Aspect Concept
 ACCOUNTING CONCEPTS

i) BUSINESSS ENTITY CONCEPT:

• Business and its owners are treated separately.
• If an owner invests money in the business, it will be treated as liability
for the business.
• If owner takes out some money from the business for personal use, it
will be considered drawing.
• Applies to partnerships, companies, sole proprietorships, small
enterprises and large enterprises
ii) GOING CONCERN CONCEPT:
• Assumes that organisation would continue its business operation
indefinitely.
• This concept provides the firm with the basis to show its asset’s value in the
balance sheet.
iii) COST CONCEPT:
• Also known as Historical Cost Concept
• Organisation should record all its assets at their purchase price in the books
of account.
• This amount also includes any transportation cost, acquisition cost,
installation cost and any other cost spent by the firm for making the asset
ready to use
iv) REVENUE RECOGNITION CONCEPT:
• Also known as Realisation Concept.
• Organisation should record its revenue from business only when it is
realised, not when the firm has received the cash.

v) MATCHING COST WITH REVENUE CONCEPT:

• Organisation should recognize its expenses in the same financial year if the
expense is related to the revenue of that year.
• Matching concept should be followed only after the realisation concept has
been fulfilled.
vi) ACCOUNTING PERIOD CONCEPT:
• Defines the time span at the end of which an organisation has to
prepare its financial statement.
• The time interval of none year is known as accounting period.

vii) MONETARY CONCEPT:

• Also known as Money Measurement Concept.
• Business should record only those transactions which can be
expressed in monetary terms.
• Records of transaction of the firm should not be recorded in physical
units.
vii) DUAL ASPECT CONCEPT:
• Describes the basis of recording business transactions in the books of
accounts.
• Every transaction of the business has a two-fold effect. Hence it should
record every transaction in two places.
• This concept can be expressed as the Accounting Equation:
ASSETS = LIABILITIES + CAPITAL
 ACCOUNTING CONVENTIONS
i) CONSERVATISM:
• Also known as Prudence Concept.
• The company must follow most conservative side of a financial
transaction, which can be done by:
a) minimising profit
b) by recording uncertain liabilities and not recognising uncertain gains.

ii) FULL DISCLOSURE:

• Business should report all the necessary information in their financial
statements, so that the users can use it to take important decision
regarding company.
iii) CONSISTENCY:
• Business should maintain the same accounting methods or principles
throughout the accounting periods, so that the users of the financial
statements or information are able to make meaningful conclusions
from the data.

iv) MATERIALITY:
• All the items that are reasonably likely to impact investor’s decision-
making must be recorded in detail in a business financial statement.
• Materiality is related to significance of information within a company’s
financial statement.
THANK YOU!