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Principles of Accounting and Accounting Assumptions

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In the modem world no business can afford to stay secretive because various parties including creditors, employees, taxation authorities, investors, public and government etc., have an interest to know about the affairs of your business.

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Principles of Accounting and Accounting Assumptions

  1. 1. principles of accounting and accounting From the modem world no business can afford to remain secretive because various parties including creditors, employees, taxation authorities, investors, public and government etc., have an interest to understand about the affairs in the business. Affairs from the business can be studied mainly by consulting final accounts and the balance sheet from the particular business. Final accounts and also the balance sheet are end products of book-keeping. Because of the significance of these statements it became necessary for the accountants to produce some principles, concepts and conventions which can be considered to be fundamentals of accounting. Such fundamentals having wide acceptance give reliability and creditability on the financial statements prepared by the accountants. The necessity for 'generally accepted accounting principles' arises for just two reasons: First, to get logical and consistent in recording the transactions and second, to comply with, the established practices and procedures. There is no agreement one of the accountants as regards the essential concepts of accounting. There is absolutely no uniformity in generally accepted accounting principles (GAPP). The terms- axioms, assumptions, conventions, concepts, generalizations, methods, rules, doctrines, techniques, postulates, standards and canons are used freely and inconsistently in the same sense. Principles "An over-all law or rule, adopted or professed as a guide to action, a settled ground or basis of conduct or practice." This definition offered by dictionaries comes nearest to describing what most accountants mean with the word 'Principle'. Care ought to be taken to make it clear that as used on accounting practice, the world principle, will not connote a rule in which there could be no deviation. An accounting principle is just not a principle within the sense it admits of no conflict with other principles. Postulates Mean to imagine without proof, to ignore or positive consent, a situation assumed as self- evident. Postulates are assumptions but are not arbitrary deliberate assumptions but generally recognized assumptions which reflect the judgment of 'facts' or trend or events, assumptions which were borne out in past by facts supposed by legal institutions leading them to be enforceable at some level. Doctrines Mean principles of belief: what the scriptures teach on any subject. It make reference to a recognised principle propagated by a teacher that is followed in strict faith. However in accounting practice, no such doctrine necessary followed nevertheless the word denotes the general principles or policies to become followed.
  2. 2. Axiom Denotes a statement of truth which can not be questioned by anyone. Standards Talk about the basis expected in accounting practice, under different circumstances. In Indian context, the Institute of Chartered Accountants of India (ICAI) constituted an Accounting Standards Board on 21st April, 1977. The main function of ASB is usually to formulate accounting standards taking into account the applicable laws, customs, usages and business environment. Accounting Assumptions ( Visit this link ) The International Accounting Standards Committee (lASC) plus the Institute of Chartered Accountants of India (ICAI) treat (vide IAS-I & AS-I) the subsequent as being the fundamental accounting assumptions: (1) Going concern Within the ordinary course, accounting assumes that the business continues to exist and keep on its operations on an indefinite period down the road. The entity is assumed to keep in operation sufficiently long to undertake its objects and plans. The values connected to the assets is going to be based on its current worth. The assumption is the fixed assets will not be designed for re-sale. Therefore, it can be contended that a balance sheet which can be prepared on the basis of record of facts on historical costs cannot show the genuine or real worth of the concern at a particular date. The underlying principle there is the earning power rather than the charge is definitely the grounds for valuing a continuing business. The company is to continue indefinitely and the financial and accounting policies are followed to maintain the continuity in the business unit. (2) Consistency There has to be uniformity in accounting processes and policies from a period to another. Material changes, if any, needs to be disclosed although there may be improvement in technique. A difference of method from a single period to another will affect caused by the trading materially. Only once the accounting procedures are adhered to consistently from year to year the outcome disclosed within the financial statements will likely be uniform and comparable. (3) Accrual Accounting attempts to recognize non-cash events and circumstances since they occur. Accrual is involved with expected future cash receipts and payments: this is the accounting procedure of recognizing assets, liabilities or income for amounts likely to be received or paid from now on. Common examples of accruals include purchases and sales of services or goods on credit, interest, rent (not even paid), wages and salaries, taxes. Thus, we make record of expenses and
  3. 3. incomes relating to the accounting period whether actual cash continues to be disbursed or received or perhaps not. When a fundamental accounting assumption (i.e. Going concern, consistency and accrual) will not be followed (in the preparation of financial statements) the simple fact needs to be disclosed. [AS-I para 27].

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