Accounting Principles

Money Measurement concept: 

1. Accounting records only menetary transactions.

2. It helps in understanding the state affairs of the business.

3. Like 2 buildings, 3 computers, 20 chairs, 10 tabels do not make any sense unless monetary value is assingned to it.

4. Even or transactions, which cannot be expressed in terms of money, do not find any place in the books of accounts though they may be very useful for the business.

 Accounting Period Concept:

1. The net income can be measured by comparing the seats of the business existing at the time of its commencement with those existing at the time of its liquidation, but life of the business is assumed to be indefinite.

2. The proprietor can't wait for such a long period.

3. Thus he has to know at frequent intervals the performance of business.

4. Therefore accounts are prepared for a shorter period mostly 12 months.

5. Such period is known as accounting period.

6. It can be a financial year (1st April to 31 March) or a calender year 1st Jan to 31st December.

Consistency Concept:

1. It is essential that accounting policies and practices and methods remains unchanged from one accounting period to another accounting period so that in case of comparison of one accounting period with another accounting period the results are meaningful and help management to draw conclusions.

2. The principle of consistency plays its role particularly when alternative accounting method are equally acceptable.

3. For eg. Method of depreciation & stock valuation.

Materiality Concept:

1. An item should be regarded as material of there is reason to believe that knowledge of it would influence the decision of informed investor.

2. In keeping with the principle of materiality unimportant items are either left of or merged with other items.

Conservatism Concept:

Meaning: 

1. As per this concept don't anticipate income but provide for possible losses.

2. This is the policy of playing safe.

3. It is also termed as prudence which means judgment based on knowledge or experience.

Relevance: For making a provision for doubtful debts, valuation of stock at a cost price or net realizable (market price less expenses of sale) whichever is less.

Cost Concept:the idea of Cost Concept is 

     1. Assets are recorded at the price paid to acquire it i.e. at cost

     2. The cost is basis for all subsequent accounting for the asset.

The cost concept inlies that if nothing has been paid for acquiring something, it would not be shown in the accounting book as an asset. When assets are recorded at the cost the change in the real worth of an asset with the passage of time is not ordinarily recorded in the books. Thus the balance sheet on a particular date prepared on the cost concept, does not, ordinarily indicate what value the assets could be sold for. It brings objectivily in the preparation of financial statements.

                  This doesn't mean that assets are always shown year after year on the same cost price. The assets recorded at cost price at the time of purchased are systematically reduced by depreciation.

Matching Concept:

Meaning:

1. Matching concept means that for calculating profit for the accounting period the expenses and income should be considered only for that particular period.

2. All costs, which are applicable to revenue of the period, should be charged against the revenue of the period.

Relevance:

1. Representative personal account.

2. So prepaid expenses are not charged to revenue of current year and even outstanding expenses are charged to current year though not paid.

Accrual Concept:

Meaning:

1. All revenues & costs are recognised as they are earned or incurred & not when received or paid in cash.

2. Normally all the transactions are should in cash but even if settlement of cash has not been taken place, it is justified to bring transaction or the events concerned in the books.

Relevance:

1. Representative personal account.

2. So prepared expenses are not charged to revenue of current year and even outstanding expenses are charged to current year though not paid.

Realisation Concept:

1. According to this concept revenue is realised when goods or services produced or rendered or rendered by a business enterprise are transferred to customer either for cash or some other assets or for a promise to pay cash in future.

2. This concept is of great importance in stopping business firms from inflating thier or profits by recording sales and income that are likely to accrue in future.

Full Disclosure:

1. To reveal all information fairly & fully, especially information of material interest which can effect the decision.

2. Full disclosure should act to convey & not to conceal information.

3. For this notes to be added.

Dual Concept: This is the core principle of accountancy.

1. All the business transactions are recorded as having dual aspect.

2. The one aspect is Debit side and other is credit side.

3. Every debit has equal amount of credit.

4. Every transaction shall satisfy the following relation-

                 ASSETS - LIABILITIES = CAPITAL

This relation is known as accounting equation.