Meaning Accounting Principal:-
Accounting Principal are the rules adopted by accountants universally while recording accounting transaction. They are the norms or rules which are followed in accounting of various items of assets, liabilities, expenses, income, etc. for example, Inventory (stock) is valued at lower of its cost or net realisable value. Fixed assets should be depreciated over their expected useful life.
According to American Institute of Certified Public Accountants
“Principles of Accounting are the general law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice”.
Features of Accounting Principles:-
- Accounting Principles are Man-Made – Accounting Principles are man-made and, therefore, they are the best possible suggestions based on practical experiences. They are recommended for use by all enterprises to ensure uniformity and understand ability.
- Accounting Principles are Flexible – Accounting Principles are not Rigid but flexible. Accounting Principles are not permanent but change with time
- Accounting Principles are Generally Accepted – Accounting Principles are the bases and guidelines for accounting and are generally accepted.
Accounting Assumptions or Concepts:-
- Going Concern Assumption – According to this assumption, it is assumed that business shall continue for a foreseeable period and there is no intention to close the business or scale down its operations significantly. It is because of this concept that a distinction is made between capital expenditure, i.e., expenditure that will give benefit for a long period and revenue expenditure, i.e., one whose benefit will be consumed or exhausted within the accounting period. On the basis of this concept, fixed assets are recorded at their original cost and they are depreciated in a systematic manner over their expected useful life.
- Consistency Assumption – According to the consistency Assumption, accounting practices once selected and adopted, should be applied consistently year after year. The concept helps in better understanding of accounting information and makes it comparable with that of previous years. Consistency eliminates personal bias and helps in showing results that are comparable. The concept is particularly important when alternative accounting practices are equally acceptable. For example, two methods of charging depreciation, Written down Value Method and Straight Line Method, are equally acceptable. Under the assumption, method once chosen and applied should be applied consistently year after year to make the financial statements comparable.
- Accrual Assumption – According to the Accrual Assumption, A transaction is recorded in the books of account at the time when it is entered into and not when the settlement takes place. The concept is particularly important because it recognizes assets, liabilities, incomes and expenses and when transactions relating to it are entered into.
Accounting Principles:-
- Accounting Entity or Business Entity Principle – According to the Business Entity Principle, business is considered to be separate from its owners. Business transactions are recorded in the books of account from the business point of view and not from that of the owners. Owners being regarded as separate from business are considered as creditors of the business to the extent of their capital. Business entity principle is applicable to all forms of business organizations, whether they are sole proprietorship, partnership or companies.
- Money Measurement Principle – According to the money Measurement Principle, transactions and events that can be measured in money terms are recorded in the book of account of the enterprise. Money is the common denominator in recording and reporting transactions.
- Accounting Period Principle – According to the Accounting Period Principle, life of an enterprise is broken into smaller periods so that its performance is measured at regular intervals. The accounts of an enterprise are maintained following the Going Concern concepts, meaning the enterprise shall continue its activities for a foreseeable future.
- Full Disclosure Principle – According to the principle of Full Disclosure, “There should be complete and understandable reporting on the financial statement of all significant information relating to the economic affairs of the entity.” Apart from legal requirements, good accounting practice requires all material and significant information to be disclosed. Disclosure of material information will result in better understanding. For example, the reasons for law turnover should be disclosed.
- Materiality Principle – Materiality Principle refers to relative importance of an item or an event. Means that it is a matter of exercising judgement to decide which item is material and which is not. And only those items should be disclosed that have significant effect or are relevant to the user. An item may be material for one enterprise but may not be material for another. For example, amount spent on repairs of building, say 2, 50,000, is material for an enterprise having a turnover of say 10, 00,000 but it is not material for an enterprise having a turnover of say 15,00,00,000.
- Prudence or Conservatism Principle – It takes into consideration all prospective losses but not the prospective profits. The application of this concept ensures that the financial statements do not paint a better picture than what it actually is. For example, closing stock is valued at lower of cost or net realisable value (market value) or making the provision for doubtful debts and discount on debtors in anticipation of bad debts and discount. Prudence or Conservatism Principle prescribes that anticipated expenses and losses should be accounted.
- Cost Concept or Historical Cost Principle – According to the cost concept, an asset is recorded in the books of account at the price paid to acquire it and the cost is the basis for all subsequent accounting of the asset. Assets is recorded at cost at the time of its purchase but is systematically reduce be charging depreciation. For example, an asset is purchased for 5, 00,000 and if at the time of preparing the final accounts, even if its market value is say 4, 00,000 or 7, 00,000, yet the asset shall continue to be shown at its purchase price of 5, 00,000.
- Matching Concept or Matching Principle – An important objective of business is to determine profit periodically. It is necessary to match ‘revenues’ of the period with the ‘expenses’ of that period to determine correct profit (or loss) for the accounting period. Profit earned by the business during a period can be correctly measured only when the revenue earned during the period is matched with the expenditure incurred to earn that revenue.
- Dual Aspect or Duality Principle – According to the Dual Aspect Concept, every transaction entered into by an enterprise has two aspects, a debit and a credit of equal amount. Simply stated, for every debit there is a credit of equal amount in one or more accounts. It is also true vice versa. For example, Nitin starts a business with a capital of 1, 00,000. There are two aspects to the transaction. On one hand, the business has an asset of 1, 00,000 (cash) while on other hand; it has a liability towards Nitin of 1, 00,000 (capital of Nitin).
- Revenue Recognition Concept – According to the Revenue Recognition Concept, revenue is considered to have been realised when a transaction has been entered into and the obligation to receive the amount is established. It is to be noted that recognising revenue and receipt of an amount are two separate aspects.
- Verifiable Objective Concept – The Verifiable Objective Concept holds that accounting should be free from personal bias. Measurements that are based on verifiable evidences are regarded as objective. It means all accounting transactions should be evidenced and supported by business documents. These supporting documents are cash memo, invoices, sales bills, etc.
Accounting Standards:-
Accounting Standards are a set of guidelines, i.e., generally accepted Accounting Principles, that are followed for preparation and presentation of Financial Statements. They are accounting rules and procedures relating to measurement, recognition, Treatment, presentation and disclosure of accounting transactions in the financial statements issued by the council of the Institute of Chartered Accountants of India.
International Financial Reporting Standards (IFRS):-
IFRS are a set of accounting standards developed by the International Accounting Standards Board (IASB), the international accounting standard-setting body. The standards issued by IASB are based on sound and clearly stated principles. Therefore, IFRS are referred to as principles-based accounting standard. This contrasts with set of standard, like Indian Accounting Standard, which contain significantly more application guidance. These standards are often referred to as rule-based accounting standards.
Indian Accounting Standards (IND-AS):-
At the same time, business environment and laws in every country are different. Therefore, it is not possible to have single set of accounting standards that will apply in all the countries. International Accounting Standards Board (IASB) has issued such standards termed as International Financial Reporting Standards (IFRS). India, instead of adopting IFRS, decided to prepare its own accounting standards equivalent to IFRS. Thus, Ind-AS can be said to be converged standards of IFRS. These accounting standards are known as Indian Accounting Standards (Ind-AS).
Generally Accepted Accounting Principles (GAAP):-
The General Accepted Accounting Principles are some typical accounting techniques that have gained global acceptability. These accounting principles define terms, treat ambiguous entries, and even prescribe industry-specific regulations and procedures. GAAP exists to ensure basic consistency in financial statements across all enterprises. It helps external users of financial statements understand a company’s accounts. GAAP also allows intra- and inter-firm comparisons, which aids investors.