ACCOUNTING PRICIPLES-SOME THOUGHTS

Introduction:
Accounting principles are the assumptions and rules of accounting the methods and procedures of accounting and the application of these rules, methods and procedures to the actual practice of accounting.
Definition of Accounting:
The American Institute of Certified Public Accountants defines accounting as “the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events, which are, in part at least, of financial character, and interpreting the results thereof”.
From the above, it is clear that, Financial Accounting basically deals with Financial Transaction. Its functions are described as follows:
Functions:
Recording – Journal entry
Classifying – Ledger accounts
Summarizing – Trail Balance, Profit and Loss account, Balance Sheet.
Interpreting – Financial performance by Profit and Loss account, Financial Position by Balance sheet.
CLASSIFICATIONOF ACCOUNTING PRINCIPLES:
Accounting Concepts:
Separate Legal Concept – here Business and Owners of the business are two separate entities. Example: The money invested by the proprietor of the business is treated as capital and shown as Liability. The business feels, one day or other it has to be returned back.
Going Concern Concept – Accounts are prepared on the basis that company will continue forever. Example: Credit sales are made, with the view that business will continue and collection can be made later.
Money Measurement Concept – here all Transactions must be expressed in terms of Money.
Cost Concept – Fixed Assets are shown at Purchase price as the base and Market value is not considered. Example: Land and Building may have increased; yet not considered. Exceptions to closing stock where valuation is done either at Cost price or Market price whichever is lower.
Dual Aspect Concern – For every Debit there is an equivalent Credit value. Example: Machinery purchased for Rs.2000.
Machinery a/c Dr. 2000
To Cash a/c 2000.
6.Accounting Period Concept – Though the company considered to be going concern, I order to measure the performance and also to ascertain its Financial Position the business transaction are related to particular segments called Accounting Period. The accounting period may be April to March or Jan to Dec.
7.Periodic Matching of Cost and Revenue – here an attempt is made to relate Revenue made with the Cost incurred. Example: Sales for accounting year is 500000, sales commission paid 20000. Assume the actual commission is to be paid is 50000. In order to match cost and revenue. Rs 30000 are cost relating to this accounting year, so the treatment goes as follows.
In Profit and Loss account In Balance Sheet Sales commission Rs.20000 outstanding commission Rs 30000
Add outstanding Rs. 10000
Realization Concepts – According to this concept revenue is recognized at the point at which the property in the goods (Ownership) transfers from seller to buyer. Example: customer “X” orders goods worth Rs.350000.Goods are manufactured and sent to “X”. Mr.”X” receives them on January 1(Ownership is transferred). Immediately sales revenue of 350000 is recorded.
Accounting Conventions:
Conservatism – Business accounts are prepared with a conservative view giving all provision for excepted loss and no provision for excepted gains. Example: Bad debts provisions are made, though actually they are not bad.
Full Disclosure – A true and fair disclosure (complete information) should be given while preparing the accounts of the business. In the annual reports of the company in order to make a complete disclosure, the practice of giving details information in the appendix is followed.
Consistency – Accounting practices should remain unchanged year after year. Example: if one method of Deprecation is adopted, while preparing the accounts of business continues to use the same method.
Materiality – The accountant gives more important to material information (significant) rather to immaterial details. Example: Expenses, which are least important to the business and for which very small amount leaves the business then, such expenses could be clubbed and showed in a single Sundry expenses account.