ACCOUNTING PRINCIPLES

General guidelines for preparing accounting statements.

Accepted by accountants all over the world.

ACCOUNTING Principles

Business Entity Concept

Money Measurement Concept

Going Concern Concept

Accounting Period Concept

Cost Concept

Double Entry Concept

Business is treated as a unit separate

and distinct from its owners.

Transactions are recorded from the

business point of view.

Owners are considered creditors of the

business to the extent of their capital

BUSINESS ENTITY CONCEPT

This gives rise to elements like

‘interest on capital’ and ‘drawings’.

Contd..

GOING CONCERN CONCEPT

Business is assumed to exist for

indefinite period.

Transactions are recorded on assumption

that it is a continuing enterprise.

On the basis of this concept fixed assets

are recorded at original cost and

depreciation is charged till it is being

used.

Contd..

For e.g. machine purchased is expected

to last over 10 years

The original cost of machine will be

spread over next 10 years

Full cost of machine will not be treated

as an expense in the year of purchase.

Transactions and events that can be

expressed in money terms are recorded.

Transactions are recorded through

common denominator, i.e. money.

MONEY MEASUREMENT CONCEPT

Qualitative aspects such as loyalty of

employees, Increased competition etc

can not be recorded.

Contd..

In accounting all the transactions are

recorded at cost and not at market value.

It is systematically reduced by charging

depreciation.

COST CONCEPT

ILLUSTRATION

Land acquire for business = Rs.2,00,000Market value of land rises to = Rs.5,00,000

The amount shown in balance sheet would be Rs.2,00,000

If an asset is acquired and nothing is

paid, it is not recorded.

For e.g. Goodwill is recorded only when it

is purchased.

Financial statements are not influenced

by personal judgments.

Contd..

The users of financial statements need

to know the results of business at

frequent intervals.

Twelve month period is usually adopted

ACCOUNTING PERIOD CONCEPT

According to income tax law, it is

compulsory to adopt financial year

beginning 1st April and ending 31st march

of next calendar year, as its accounting

period.

Companies whose shares are listed are

required to publish quarterly results.

DOUBLE ENTRY CONCEPT

•Every business transaction has a dual

aspect.

•Every transaction affects at least two

accounts.

•Two sides of balance sheet are always

equal:

Assets = Capital + Liabilities

ILLUSTRATION

Purchase goods on credit for Rs.30,000

Assets = Capital + Liabilities

30,000 = 0 + 30,000