Money Measurement Concept:
All transactions of a business are recorded in terms of money. An event or a transaction that cannot be expressed in money terms, cannot beaccounted in the books of accounts.
The time interval for which accounts are prepared is an importantfactor even though we assume long life for a business. The accounting period could behalf year or even a quarter. The financial statements should be prepared at the end of eachaccounting period so that income statement shows profit or loss for that accounting period. So also a balance sheet is prepared to depict the financial position of the business.
Profit earned or loss suffered for an accounting period is the result of both cash and credit transactions. It is possible that certain incomes are earned but notreceived and similarly certain expenses incurred but not yet paid during an accounting period. But it is relevant to consider them while computing the financial results just because they are related to the specific accounting period.
Accounting Principles are the rules basing on which accountingtakes place and these rules are universally accepted.
Principle of Income Recognition:
According to this concept, revenue is considered as being earned on the date on which it is realized, i.e., the date on which goods and servicesare transferred to customers for cash or for promise. It should further be noted that it isthe amount which the customers are expected to pay which shall be recorded. In effect,only revenue which is actually realized should be taken to profit and loss account.Unrealized revenue should not be taken into consideration for determining the profit.
Principle of Expense:
Expenses are different from payments. A payment becomesexpenditure or an expense only when such payment is revenue in nature and made for consideration.
Principle of Matching Cost and Revenue:
Revenue earned during a period is comparedwith the expenditure incurred to earn that income, whether the expenditure is paid duringthat period or not. This is matching cost and revenue principle, which is important to findout the profit earned for that period. Here costs are reported as expenses in the accounting period in which the revenue associated with those costs is reported.
Principle of Historical Costs:
This is called ‘cost’ principle. All assets are recorded atthe cost of acquisition and this cost is the basis for all subsequent accounting for theassets. The expenses and the goods purchased are shown at the value at which they areincurred. The value of the assets is constantly reduced by charging depreciation againsttheir cost to present their book value in the balance sheet.