ACCOUNTING PRINCIPAL

  Definition of Accounting Principles

firstly we discussed about what is accounting?

The American Accounting Association defines accounting as "the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by the users of the information."

According to AICPA (American Institute of Certified Public Accountants) it is defined 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 a financial character and interpreting the result thereof."

Steps of Accounting

The following are the important steps to be adopted in the accounting process:

(1) Recording: Recording all the transactions in subsidiary books for purpose of future record or reference. It is referred to as "Journal."

(2) Classifying: All recorded transactions in subsidiary books are classified and posted to the main book of accounts. It is known as "Ledger."

(3) Summarizing: All recorded transactions in main books will be summarized for the preparation of Trail Balance, Profit and Loss Account and Balance Sheet.

(4) Interpreting: Interpreting refers to the explanation of the meaning and significance of the result of finanal accounts and balance sheet so that parties concerned with business can determine the future earnings, ability to pay interest, liquidity and profitability of a sound dividend policy.

READ ALSO:- ACCOUNTING, TYPES OF ACCOUNTS

MEANING AND DEFINITION  OF ACCOUNTING PRINCIPLE

Accounting principles refer to the rules and actions adopted by the accountants globally for recording accounting transactions.

- These are classified into two categories:

Accounting concepts

Accounting conventions

- According to the American Institute of Public Accountants "Accounting principles are the general laws or rules adopted or professed as a guide to action. It is a basis of conduct or practice."

According to  L. S. Porwal - Accounting principles are general decision rules derived from both the objectives and theoretical concepts of accounting, which govern the development of accounting techniques.

ACCOUNTING PRINCIPLES are the rules & benchmarks in accounting field, co, should follow while reporting financial statements. Common set of accounting standards U.S. based is GAAP (Generally Accepted Accounting Principles).

Features  of Accounting principles:

1. Accounting principles are still evolving.

2. These principles are dynamic and not fixed or rigid.

3. They are designed to make accounting data provide objectivity, application, usefulness and simplicity to its users.

4. These rules are based on the custom, usages and traditions.

5. Accounting principles cannot be validated by reference to natural laws

6. Have no authoritativeness as universal principles.

KINDS OF ACCOUNTING PRINCIPAL

1.ENTITY CONCEPT:- As per this concept the business is considered to have a separate identity apart from its owner. Only the business transactions are recorded in the books of Accounts. Personal transactions of the owner are recorded in his own personal books of Accounts. As per this concept the business is liable to pay to the owner the capital brought by him.

2.COST CONCEPT:- Cost Concept: The value of an asset is to be recorded on the basis of its purchase cost

3. GOING CONCERN CONCEPT:-  Business may continue forever & will carry out its goals & plans in foreseeable future.As per this principle, it is assumed that business has no end date. It will go on for ever. It is eternal.

4.TIME PERIOD There should be a standardized time period of reporting the financial statements usually monthly, quarterly or annually.

5.HISTORICAL COST Recordation of the assets should be on their purchased values purchased now or years ago

6.MONEY MEASUREMENT CONCEPT :-As per this concept only those transactions that can be measured in terms of money are to be recorded in the books of accounts.transactions that carry a monetary value & stated in terms of a currency (for example $ in the U.S.) should only be recorded.

7.MATCHING CONCEPT:-  A company should report an expense in the period in which it earns the corresponding revenue.The debit side should match with the credit side

8. RECOGNITION CONCEPT :- Company should record the revenue and cost as an when they occur and not when cash is received / paid.

9. ECONOMIC ENTITY Owner & business as two different entities having different liabilities

ACCOUNTING CONVERSIONS

1. MATERIALITY  CONVERSIONS :- The information which will have a material effect should form a part of the financial statements.

2. CONSISTENCY CONVERSIONS:-  Consistency in the usage of methods, principles until another outstanding method comes proves to be better.

3. FULL DISCLOSURE CONVERSIONS :- Disclosure of all important Information for the users, lenders or investors within the financial statements or as a footnote.

4. CONSERVATISM CONVERSIONS : This concept implies that the accountant should not anticipate income but provide for all possible losses. This concept puts a guard against all possible losses. Valuation of stock at cost or market price whichever is less, Providing R.D.D. and R.F.D.D. are examples of conservatism.If a situation arises where there are 2 acceptable options for reporting an item accountant goes for less favorable option