ACCOUNTING PRINCIPLES

ACCOUNTING CONCEPTS AND CONVENTIONS

Accounting is the language of business. To make the language convey the same meaning to all
people, accountants all over the world have developed certain rules, procedures and conventions
which represent a consensus view by the profession of good accounting practices and
procedures and are generally referred to as Generally Accepted Accounting Principles (GAAP).

Thus, GAAPs are common set of accounting principles standard and procedures that companies
use while preparing their financial statements.

Meaning of Accounting Principles :

Accounting Principles are the guidelines and general rules to prepare the financial statements.

Accounting principle can be classified in to two categories :

1. Accounting Concepts
2. Accounting Conventions

Accounting concepts : accounting concepts may be considered as postulates i.e., basic

assumptions or conditions upon which the science of accounting is based.

Accounting conventions: The term conventions denote circumstances or traditions

which guide the accountants while preparing the accounting statements. It refers to a
statement or rule of practice which, by common consent, express or implied is employed
in treating a situation.

ACCOUNTING PRINCIPLES

ACCOUNTING CONCEPTS ACCOUNTING CONVENTIONS

1. Business entity 1. Consistency

2. Money measurement 2. Full Disclosure
3. Going concern 3. Conservatism
4. Cost 4. Materiality
5. Dual aspect
6. Accounting period
7. Matching
8. Realization
9. Objective evidence
10. Accrual
ACCOUNTING CONCEPTS

1. BUSINESS ENTITY CONCEPT: This concept implies that a business unit is separate and
distinct from the owner. Irrespective of the form of organization, a business unit has
got its own individuality as distinguished from the persons who own or control it.
2. Money measurement concept : according to this concept, only the transactions and
events which can be expressed in terms of money is recorded in the books of accounts.
Events and facts which cannot be expressed in terms of money cannot be recorded in
the books.
3. Going concern: this concept signifies that the business will continue for an indefinite
period of time and has a long duration of economic life.
4. Cost: this is also called as Historic Cost principle. This says that, in the balance sheet
the Fixed Assets should be shown at its original cost and not at the market value. As
the market value is subject to fluctuation, the balance sheet cannot show different
value of assets in different years. The fixed assets should be shown at its original cost.
5. Dual aspect: this is the basic concept of accounting. According to this concept, every
transaction involves a twofold aspect. (a) yielding of a benefit, and (b) giving of that
benefit. In the books of account both the aspects are recorded. One aspect being
“Debit” aspect and the other one being “Credit” aspect. So, every transaction has two
aspects, where one account gets debited and other gets credited.
6. Accounting period: according to this concept, the accounting period is the duration
of twelve months. The Profit or Loss of the business or business position will be
compiled once in a year.
7. Matching: matching principle is based on accounting period concept. The most
important objective of running a business is to ascertain the profit periodically. The
determination of profit is by matching the revenue of the period with the cost of that
period. If the revenue exceeds expenses, it is called profit, if expenses exceed revenue
it is called losses.
8. Realization : it is related do revenue. According to this concept, revenue is
considered as being earned on the date at which it is realized, i.e., on the date when
the property in goods passes to the buyer and he becomes legally liable to pay.
9. Objective evidence: according to this concept, entries in accounting records and data
reported in financial statements must be based on objectively determined evidence.
Invoices and vouchers for purchases and sales, bank statements, store records etc., are
the examples of physical evidence.
10.Accrual : double entry system of accounting is based on accrual concept. According
to this “Incomes” and “Expenses” are recorded when they are “earned” and
“incurred”, not necessarily “received” and “paid”. The receipt and payment may
 happen on a future date, but if the earning and incurring has happened with in the
accounting period, it should be recorded.

ACCOUNTING CONVENTIONS

1. Convention of Consistency: Accounting rules, practices and conventions should be

continuously observed and applied. i.e., these should not change from one year to
another. The results of different years will be comparable only when same accounting
methods and accounting rules are followed year after year.
2. Convention of Full Disclosure: According to this convention, all accounting statements
should be honestly prepared and to that end full disclosure of all significant information
should be made. All information which is of material interest to proprietors, creditors and
investors should be disclosed in accounting statements.
3. Convention of Conservatism (Prudence):It is a policy of caution or playing safe and
had its origin as a safeguard against possible losses in a world of uncertainty. The
working rule is “anticipate no profits, but provide for all possible losses”. Because of this
principle the provisions are created and assets and inventories are shown at the least value
possible.
4. Convention of Materiality: Materiality depends on the amount involved in the
transaction. Ex: minor expenditure of Rs.20 for the purpose of a waste basket may be
treated as an expense of the period rather than an asset.

LIST OF INDIAN ACCOUNTING STANDARDS

The Institute of Chartered Accountants of India, being the premier accounting body in India
is authorized to issue Accounting Standards with Ministry of Corporate Affairs. Accounting
Standards provide the guidelines and Framework for the preparation of financial reports. The
Accounting Standards gives the standard way of treating particular items in the financial
reports.

The list of Accounting Standards issued by ICAI is as follows:

AS No Accounting Standard
AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies & Events occurring after balance sheet date
AS 5 Net profit or Loss for the period, prior period items and changes in
accounting policies
AS 6 Depreciation Accounting
AS 7 Construction Contracts
AS 8 Accounting for Research and Development
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of changes in Foreign Exchange Rates
AS 12 Accounting for Government Grants
AS 13 Accounting for investments
AS 14 Accounting for Amalgamation
AS 15 Employee Benefits
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related party disclosure
AS 19 Leases
AS 20 Earnings Per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income
AS 23 Accounting for investments in Associates in consolidated Financial
Statements
AS 24 Discounting Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of interests in joint ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent Liabilities and Contingent Assets
AS 30 Financial Instruments: Recognition and measurement
AS 31 Financial instruments : Presentation
AS 32 Financial Instruments : Disclosures

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