2. MEANING & DEFINITION
As we know that Accounting is the language of Business, every event and transaction occurring
in the business which is of economic nature is recorded through Accounting which itself is a
discipline in its own. Now as with every other discipline, Accounting too has some guiding
principles, conventions and concepts which helps an accountant to perform his/her task in the
most efficient and orderly manner.
These Principles, Conventions or Concepts are together known as Generally Accepted
Accounting Principles or GAAP.
3. These Accounting Principles are issued by the authority of Financial Accounting Standards Board
(FASB).
According to Oxford Reference, “The basic theoretical ideas devised to support the activity of
accounting.”
Accounting principles are those rules of actions on the basis of which the transactions of the business
are recorded, classified and summarized. If the financial statements are not prepared on the basis of
these principles, there will be low acceptability and difficulty to understand them, and the comparison
will be impossible and unreliable.
These Principles are universally accepted, some of them have now become mandatory and others are
still voluntary in nature, so as to flexibly adjust them in the working of the Business as per its factors.
4.
5. IMPORTANCE OF ACCOUNTING PRINCIPLES
1. Uniform Standard: -Accounting Principles provide a uniform standard to report and present
the financial information of the Enterprise or the Business.
2. Universal Acceptance: -Since they are Universally Accepted, any kind of Stakeholder can
easily assess what is being presented to them and what decisions are to be made.
3. Rules & Guidelines: -Accounting Principles set up rules and guidelines for preparing
accounting Information, which if not adhered to will result in chaos and confusion in the
statements of the Business.
4. Reduces Mistakes: -They help Business get key insights of their on performance and
furthermore reduces any erroneous reporting by having numerous checks and safeguards.
6. THE PRINCIPLES
Going Concern Revenue Recognition
Business Entity Materiality
Money Measurement Full Disclosure
Accrual Verifiable Objective Evidence
Accounting Period Dual Aspect
Historical Cost Matching
Conservatism or Prudence Consistency
7. Going Concern:-
The Going Concern Concept is the chief
principle, guiding Accountancy. It states that a
Business shall continue for a foreseeable future
and should not terminate or close down in a
short period of time. All the accounting shall
be done with the assumption that the business
will go on a perineal amount of time.
Business Entity: -
This concept says that in the eyes of law, the
Business and the Businessman are two
separate entities having their own individual
existence. It helps in separating the
transactions of the owner and his enterprise.
8. Money Measurement: -
The concept expresses that in Accounting, only
those transactions should be recorded which
can be measured in the terms of money or can
be measured financially. In other words, only
Quantifiable events hold importance in
Accountancy.
Accrual: -
Accrual concepts tells us that all the
transactions or events, even if they are not
settled in cash, must be taken into account.
Basically occurrence of the event precedes the
actual exchange. In simple words both Cash
and Credit shall be recorded.
9. Accounting Period: -
It commands that since business is going
concern, all of its accounting shall be done and
presented on a periodic basis and that period
should be 1 year. This period can either be of 1
January-31 December or 1 April-31 March.
This is known as Accounting Year.
Historical Cost: -
Historical Cost or Cost Concept states that all
the assets of the business shall be recorded on
their purchased value not their market value.
The amount which the Enterprise actually paid
for acquiring the asset takes importance. It
prevents arbitrary values being put on
transactions.
10. Conservatism: -
Also known as Prudence, this concept tells us
that an accountant should work cautiously, and
we must record all the anticipated losses or
expenses and ignore the anticipated profits. In
simple words, always be ready for any
uncertain loss and ignore any uncertain profits.
Revenue Recognition: -
It is also called Realization concept, It says
that Revenue or income should be recorded
when it is realized not when actual cash
payment is received for it. Revenue is
considered to be made when title of ownership
of goods passes from the seller to buyer and
the buyer become legally liable to pay.
11. Full Disclosure: -
As the name implies, This principle says that
each and everything whether it is big or small,
if it is related to business, it should be
disclosed by the enterprise from its side.
Nothing should remain secret. This concept is
particularly helpful for small businesses which
have little transactions and each has its
importance.
Materiality: -
The exact opposite of Full Disclosure, it
commands that only those things shall be
disclosed which actually have significant effect
on the business. A minor or petty transactions
is not important. This is followed by large
enterprises where there are huge number of
transactions and not all of them are important.
12. Verifiable Objective Evidence: -
Just as its title, this principle instructs that each
and every transaction which occurs in the
business shall carry an evidence or proof with
it, so it can be validated any time if required.
Nothing should be present in business without
a hard proof, for e.g. Bills, Voucher, Pay-slips
etc.
Dual Aspect: -
This concept dictates that every transaction in
business has a dual effect. If something comes
in business, then there must be something that
goes out of it. This concept governs the
working of debit and credit in Accountancy.
13. Matching: -
This Principle directs that for the correct
calculation of the profit or any other value, the
revenues and expenses of the corresponding
period shall be considered. All the revenues of
one year shall be matched with the expenses of
the same year.
Consistency: -
In Accounting there are various types of
methods to calculate different values like
depreciation, inventory etc. This concept
guides that any method which is adopted shall
be used consistently for a number of years
rather than changing methods frequently.
14. CONCLUSION
To conclude, I would like to say that Accounting Principles hold utmost importance in the field of
Accounting, as they are the foundation on which the whole discipline of Accountancy is
depended for its functioning and working. They must be properly studied and understood before
performing any activity related to Accountancy so as to avoid any mistakes or problems in the
recording or presentation of the Accounting Data.