Accounting Principles

ACCOUNTING PRINCIPLES
FUNDAMENTAL ACCOUNTING ASSUMPTIONS:
There are two fundamental accounting assumptions that are accounted for when preparing financial
statements: (a) Going Concern and (b) Accrual Basis.

1) Going Concern:
This assumption is based on the principle that while making the financial statements of an entity
we will assume that the company has no plans of winding up in the near future. So the
assumption is that the company will continue to exist indefinitely (far into the future), i.e. it will
keep on going.

The proprietor has neither need nor intention to close it in the near future or curtail materially. The
entity would be able to meet its obligations according to plan.

2) Accrual Basis:
Under this assumption, accounting transactions are recorded in the books of accounts when they
occur.
• The revenue will be recognized in the period it has been realized in, irrespective of money
was actually received or not.
• Expenses are to be recognized in the year in which they facilitate the earnings of revenue,
irrespective whether actual cash was paid or not.

ACCOUNTING CONCEPTS & PRINCIPLES:

1) Business Entity / Separate Entity concept:

A business and its owner should be treated separately as far as their financial transactions are
concerned – business and its owners are separate entities. All transactions of the business are
recorded in the books of business from the point of view of business. Income or profit is the
property of the business unless distributed among the owners.

2) Money measurement concept:

Only business transactions that can be expressed in terms of money are recorded in accounting,
though records of other types of transactions may be kept separately.

3) Dual / two-fold aspect concept:

For every credit, a corresponding debit is made. The recording of a transaction is complete only
with this dual aspect.

4) Cost concept:
The fixed assets of a business are recorded on the basis of their original cost in the first year of
accounting. Subsequently, these assets are recorded minus depreciation. No rise or fall in market
price is taken into account. The concept applies only to fixed assets.

5) Accounting year concept:

Each business chooses a specific time period to complete a cycle of the accounting process—for
example, monthly, quarterly, or annually—as per a fiscal or a calendar year.

6) Conservatism / Prudence:
It is the convention by which, when two values of a transaction are available, the lower-value
transaction is recorded. By this convention, profit should never be overestimated, and there
should always be a provision for losses.

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Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance
 Accounting Principles

7) Consistency:
It prescribes the use of the same accounting principles from one period of an accounting cycle to
the next, so that the same standards are applied to calculate profit and loss. Consistency
improves comparability both in terms of time series and cross sectional.

8) Materiality:
It means that all material facts should be recorded in accounting. Accountants should record
important data and leave out insignificant information. An item is material if its omission or
misstatement could influence the economic decisions made by the users. Judgement of
materiality depends from organisation to organisation and on the basis of professional experience
and judgement.

9) Full disclosure:
Entails the revelation of all information, both favorable and detrimental to a business enterprise,
and which are of material value to all stakeholders.

10) Substance over form:

Accounting transactions and events are recorded based on “economic substance (reality)” not as
per “legal form”. Example is lease accounting.

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Prepared by: M. Umar Munir (Gold Medalist), FCMA, MS Finance