Competitive Exams Accountancy Principles

Basic features of accounting principles

According to one school thought principle means fundamental belief or general truth.

The basic features of accounting principles are

1 Usefulness: An accounting principle should be useful that is an accounting rule which does not increases the utility of the records is not accepted as an accounting principle.

2 Objectivity: Accounting principle should be objective in nature. It should not be influenced by the personal bias.

3Feasibility: Accounting principle should be practicable and feasible

Accounting Principles

There are two kinds of accounting principle 1 Concepts 2 Conventions Concepts: The term concept is used to mean the accounting postulates. I. e. Necessary ideas and assumptions which are fundamental to accounting practice.

  • Entity: Which means a business institution in its own right is difference from the parties who owns it. In other words business institution is a legal person having its own entity and is different from those who have generated the funds to form it.
  • Continuity or going concern: Which means a business institution when set up is not expected to be liquidated or dissolved in the near future; it is perpetual. It is assumed that the concern will continue indefinitely.
  • Daily concept: The recognition of two aspects to every transaction is known as duality concepts or dual aspects analysis. modern financial accounting is based on such recognition. One entry consists of debit and another accounts consists credit. The total amount debited equals to the total amount credited. This balancing of the credit and debit is the fundamental and basic concepts of modern management. Accounting period: Twelve months period is normally adopted as accounting period under the companies act and banking regulation act. Accounts are to be prepared for 12 months period.
  • Historic cost: This concept indicates that the value of transaction is recorded at the price paid to acquire it, that is at its cost and the cost is the basis for all subsequent accounting. The value may change in future but the recorded cost does not change. Money measurement: In this concept all the event happening or transaction is recorded in terms of money. In other words a fact or happening which cannot be expressed in terms of money is not recorded in the accounting books. Revenue recognition/realization concept: The revenue is derived from selling the products, rendering services, deposing of resources other that product. The revenue is generally recognized when the earning process is complete or reasonably complete and an exchange is taken place. Thus when a sale has been affected there is evidence of revenue realized and the inventory exchanged for costs or account receivable.
  • Matching: This concept consists of two different concepts, concepts of accounting period and concept of matching. Once the revenue is recognized to have been earned then it is essential to determine the related expenses and costs incurred for earning the same. For determining the net profit, both costs product cost and period cost are matched against the revenue. This process is known as matching of cost against revenue.
  • Accrual: This concept indicates that the revenue recognition depends on its realization and not actual receipt. Provision to be made for income accrued relating to a particular period.
  • Objectivity: According to this concept all accounting must be based on objective evidence. In other words the transaction recorded should be supported by variable documents.