Accounting Concepts and Principles

Accounting principles help to fill the gap and focus to bring some level of standardization in financial reporting. If each business makes the financial statement in their method, then there will be an enormous amount of financial statement formats trying to reflect similar information. It becomes almost unachievable for a business to compare and understand the statements of other companies. As an outcome, financial data becomes incomparable and difficult to understand. Accounting principles include the accounting concepts and conventions that help to understand the financial statements and help the management to make reliable decisions. 

MEANING OF ACCOUNTING

Accounting is an important part of every business irrespective of the size of the business entity. With the business requirements of modern times businesses, business and accounting go hand in hand, they cannot function without each other. By recording all the financial transactions, accounting helps in ascertaining the financial performance of the business by preparing financial statements. These financial statements are used by both internal stakeholders as well as external stakeholders like the investors, tax authorities, regulators, banks, and other users.

MEANING OF ACCOUNTING PRINCIPLES

The accounting principle states the common rules or regulations for recording financial transactions and making financial statements. Accounting principles are the initial guidelines for recording and preparing financial statements. The accounting principles are generally termed as ‘Generally Accepted Accounting Principles or simply GAAP.

Accounting principles help to convey standardization in accounting and preparing financial statements and it is applied worldwide. The supervisors and authorities of every country may have their accounting principles like UK GAAP, USA GAAP, Ind As, IFRS, and others, but at the central, the fundamentals and objectives of accounting principles continue to be the same. Accounting principles are accepted if they are objective, operational in practical circumstances, dependable, economical, in the sense that they can be applied without suffering high costs, and logical to those with a minimum required knowledge in finance.

BASIC ACCOUNTING PRINCIPLES

There are certain basic principles of accounting that are to be kept in mind while preparing financial statements. The following are discussed below:

Historical Cost Principle

This principle needs the companies to keep a track of the goods purchased, services rendered, or capital assets acquired at the price expended for them. Assets are then recorded on the balance sheet at their historical cost without adjusting them for the changes in the market value of these assets.

Revenue Recognition Principle

This principle needs the companies to record their income or revenue as and when it is earned instead of when it is received. This accrual basis of accounting provides a more precise presentation of financial events that occurred during the accounting period.

Matching Principle

This principle mentions that all the expenses must be matched and recorded with their particular revenues at the time that they were experienced instead of when they are spent. This principle coordinates with the principle of revenue recognition confirming that all incomes and expenses are recorded on an accrual basis.

Disclosure Principle

This principle necessitates that any information that would significantly affect the decision of the user of financial statements about the company must be disclosed in the form of notes in the financial statements. This restricts the companies from misappropriating significant information about accounting practices or known possibilities in the future.

Cost-Benefit Principle

This principle binds the essential amount of research and time to record or account for the financial information if the cost crosses over the benefit. Therefore, if recording an insignificant event costs the company a substantial amount of money, it should not be recorded in the books.

Conservatism Principle

It is the principle that shows the general idea of identifying expenses and liabilities as soon as possible when there is doubt about the result but to only identify revenues and assets when they are confident of being received.

Objectivity Principle

Under this principle, the financial statements, records of accounts, and financial information as a total should be not dependent and free from biases. The financial statements are intended to show the financial position of the company and not to influence the end-users to take appropriate actions.

Consistency Principle

This principle mentions that all accounting principles and traditions should be functional steadily from one period to the other. This guarantees that financial statements can be compared between different stages and during the past of the company.

MEANING OF ACCOUNTING CONCEPTS

Accounting Concepts can be taken as the basic accounting statement, which acts as a base for the preparation of a financial statement of an enterprise. This forms a foundation for framing the accounting principles, methods, and procedures, to record and present the financial dealings of a business. These concepts provide an integrated building and rational method of the accounting process. Every financial transaction that arises is understood taking into attention the accounting concepts, which guide the methods of accounting.

BASIC ACCOUNTING CONCEPTS

Various accounting concepts help to frame financial statements accurately. Some of the accounting concepts are as follows:

Business entity concept: This concept implies that a business and its proprietor should be treated distinctly for the financial transactions of the business.

Money measurement concept: This concept shows that only business dealings that can be expressed in monetary terms are documented in accounting, and the records of other types of events may be disclosed separately in the books. 

Dual aspect concept: This concept implies that for every account credit, a matching account shall be debited. Therefore, the dual aspect concept completes the recording of the transactions.

Going concern concept: This concept means that a business is anticipated to last for a reasonably long time and carry out its activities and obligations. This predicts that the business will not be required to rest working and discharge its assets at unreasonable prices.

Cost concept: This concept requires that the fixed assets of a business are documented based on their initial cost in the first year of accounting. Eventually, these assets are recorded deducting the amount of depreciation. A rise or fall in the market price of the assets is not considered. This concept is only applicable to fixed assets.

Accounting year concept: This concept implies that each business indicates a particular period to complete an accounting cycle process, for example, monthly, quarterly, or annually as per a fiscal or a calendar year.

Matching concept: This concept implies that for every transaction of revenue recorded in a particular accounting period, a corresponding expense transaction has to be recorded for accurately calculating profit or loss in a given accounting period.

Realization concept: As per this concept, profit is identified in the books only when it is earned. An advance or fee paid is not identified as a profit till the goods or services have been transported to the buyer.

MEANING OF ACCOUNTING CONVENTIONS

Accounting Conventions as the name recommends are the methods accepted by an enterprise over some time, that depend on the common contract between the accounting bodies and help in supporting the accountant at the time of preparation of a financial statement of the company. To advance the value of financial data, the accounting bodies of the world may amend or change any accounting convention.

BASIC ACCOUNTING CONVENTIONS

Conservatism

It is the convention by which the transaction with a lower amount is recorded when two transactions of different amounts are provided. By this convention, profits are not recorded for an overestimated amount, and losses or expenses are provided as provisions in the books.

Consistency 

This convention implies the usage of the same principles of accounting from one period to the other period of an accounting cycle so that the same methods are functional to calculate profit and loss earned during a period.

Materiality 

This convention shows that all significant facts should be recorded and disclosed in the books of accounts. Accountants should record important data and can ignore information that is not significant.

Disclosure 

This convention implies the disclosure of all information, both advantageous and disadvantageous to a business enterprise, and which are of significant value to creditors and debtors.

Conclusion

Accounting helps in ascertaining the financial performance of the business by preparing financial statements. The accounting principles are generally termed as ‘Generally Accepted Accounting Principles or simply GAAP. The accounting principle states the common rules or regulations for recording financial transactions and making financial statements. Every financial transaction that arises is understood taking into attention the accounting concepts, which guide the methods of accounting. Accounting Conventions as the name recommends are the methods accepted by an enterprise over some time, that depend on the common contract between the accounting bodies and help in supporting the accountant at the time of preparation of a financial statement of the company.