2. Theory Base of Accounting | Accounting Principle Accounts class 11
2. Theory Base of Accounting | Accounting Principle Accounts class 11
Accounting Principle
MEANING AND NATURE OF ACCOUNTING PRINCIPLES -
“ principles of accounting are general law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice. “
-The American Institute of Certified Accountants.
In simple words, accounting principles are general law or rules which are generally adopted and accepted by accountants while they recording financial transactions.
FEATURERS OF ACCOUNTING PRINCIPLES –
(i) Accounting principles are man-made.
(ii) Accounting principles are flexible. Accounting principles are not permanent it can be change with time.
(iii) Accounting principles are generally accepted
THE FUNDAMENTAL ACCOUNTING ASSUMPTIONS –
1. GOING CONCERN ASSUMPTION –
- According to this assumption, it is assumed that business shall continue for a foreseeable period and there is no intention to close the business.
- This implies that business will not be closed or dissolved in near future unless there is a clear evidence of closer.
- On the basis of this concept, fixed assets are recorded at their original cost not at market price and depreciated in systematic manner.
- Because of this concept, difference between capital expenditure and revenue expenditure are made.
2. CONSISTANCY ASSUMPTION –
- According to this assumption, accounting practices once selected or adopted, should applied consistantly year after year.
- In simple words it means that once a accounting methods or practices selected or adopted, should be used for long period.
- This concept helps in better understanding, comparisssion of results.
- For example, there has two methods of depriciation first is WDV and second is straight line method which is used mostly. than this principle says if you adopt any of them than appiy it for long term. not change it again and again.
3. ACCRUAL ASSSUMPTION -
- According to this assumption, a transaction should be recorded in the books of accounts when it is entered into not when the settlement take place.
- in simple words, this assumption says a transaction should be recorded in the books of accounts when it is entered into whether it is cash transaction or credit transaction.
- terms like prepaid expenses, outstanding expenses, accrued incomes are arise because of this assumption.
Basic Accounting Concepts or principles
The basic accounting concepts are referred to as the fundamental ideas or basic assumptions underlying the theory and practice of financial accounting and are broad working rules for all accounting activities and developed by the accounting profession. The important concepts have been listed as below:
• Business entity;
• Money measurement;
• Going concern;
• Accounting period;
• Cost
• Dual aspect (or Duality);
• Revenue recognition (Realisation);
• Matching;
• Full disclosure;
• Consistency;
• Conservatism (Prudence);
• Materiality;
• Objectivity
Business Entity Conceptn or principle :
- The concept of business entity assumes that business has a distinct and separate entity from its owners.
- in other words, It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities.
- therefore, finacial transactions are recorded in the books of accounts from business point of view not owner point of view.
- for example: when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner.
Money Measurement Concept or principle :
- The concept of money measurement states that only those transactions and happenings in an organisation which can be expressed in terms of money are to be recorded in the book of accounts.
- In other words this principle says that only those transactions should be recorded in the books of accounts which can be measures in the terms of money.
- Will not be recorded in the book of Accounting: All such transactions or happenings which can not be expressed in monetary terms, for example, the appointment of a manager, capabilities of its human resources or creativity of its research department or image of the organisation among people in general do not find a place in the accounting records of a firm.
Accounting Period Concept or principle :
- According to this principle life of an enterprise is broken into smaller periods so that its performance is measured at regular interval.
- Accounting period refers to the span of time at the end of which the financial statements of an enterprise are prepared, to know whether it has earned profits or incurred losses during that period and what exactly is the position of its assets and liabilities at the end of that period.
- Such information is required by different users at regular interval for various purposes, as no firm can wait for long term to know its financial results as various decisions are to be taken at regular intervals on the basis of such information.
- Because of this principle, financial statements are, therefore, prepared at regular interval, normally after a period of one year, so that timely information is made available to the users. This interval of time is called accounting period.
Cost Concept or historical cost principle :
- The cost concept requires that all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use.
- in simple words, market value of an asset may change with passage of time but for the purpose of accounting assets are recorded at their book value.
- For example, an asset is purchased for Rs.8,00,000 and assumes its market value is Rs.5,00,000. therefore at a time of preparing final accounts assets are recorded in the books of accounts at a price of Rs.8,00,000.
Dual Aspect Concept :
- Dual aspect is the foundation or basic principle of accounting.
- It provides the very basis for recording business transactions in the books of accounts.
- This concept states that every transaction has a dual or two effects and should therefore be recorded at two places.
- In other words, at least two accounts will be involved in recording a transaction.
- The duality principle is commonly expressed in terms of fundamental accounting Equation, which is as follows :
Assets = Liabilities + Capital
In other words, the equation states that the assets of a business are always equal to the claims of owners and the outsiders
- In fact, this concept forms the core of Double Entry System of accounting.
Revenue Recognition :
Revenue is the gross in-flow of cash arising from the sale of goods and services by an enterprise and use by others of the enterprise resources yielding interest royalities and divididends. The concept of revenue
recognition requires that the revenue for a business transaction should be considered realised when a legal right to receive it arises.
Matching :
- This concept is based on the accounting period concept.
- The concept of matching emphasises that expenses incurred in an accounting period should be matched with revenues during that period.
- It follows from this that the revenue and expenses incurred to earn these revenue must belong to the same accounting period.
- In simple words, according to this concept, the expenses for an aaccounting period are matched against related revenues, rather than cash recived and paid to determine correct profit or loss for the accounting period.
Full Disclosure concept :
- This concept requires that all material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes.
Conservatism or prudence principle :
- According to this principle, Do not anticipate for profits but provide for all posisble loses.
- This concept requires that business transactions should be recorded in such a manner that profits are not overstated. All anticipated losses should be accounted for but all unrealised gains should be ignored.
- example - povision for bad debts, provision for depriciation.
Materiality :
This concept states that accounting should focus on material facts. If the item is likely to influence the decision of a reasonably prudent investor or creditor, it should be regarded as material, and shown in the
financial statements.
Accounting Standards :
Accounting standards are written statements of uniform accounting rules and guidelines in practice for preparing the uniform and consistent financial statements. These standards cannot over ride the provisions of applicable laws, customs, usages and business environment in the country.
International financial reporting standards (IFRS)
Characteristics of a Business Transaction :
1. It is concerned with money or money’s worth of goods or services.
2. It arises out of the transfer of exchange of goods or services.
3. It brings about a change in the financial position (assets and liabilities).
4. It has an effect on the accounting equation.
5. It has dual aspects or sides- ‘ receiving’ (Debit) and ‘giving’ (Credit) of the benefit.
Basis of Accounting:
(1) Cash basis
Under this, entries in the books of accounts are made when cash is received or paid and not when the receipt or payment becomes due. For example, if salary Rs. 7,000 of January 2010 paid in February 2010 it would be recorded in the books of accounts only in February, 2010.
(2) Accrual basis
Under this, however, revenues and costs are recognized in the period in which they occur rather when they are paid. It means it record the effect of transaction is taken into book in the when they are earned rather than in the period in which cash is actually received or paid by the enterprise. It is more appropriate basis for calculation of profits as expenses are matched against revenue earned in the relation thereto. For example, raw materials consumed are matched against the cost of goods sold for the accounting period.
Accounting Standards :
- Accounting standards are written statements of uniform accounting rules and guidelines in practice for preparing the uniform and consistent financial statements.
- in other words accounting standards are set of guidelines followed by accountants which is imosed by law, statute or professional body.
- These standards cannot over ride the provisions of applicable laws, customs, usages and business environment in the country.
Accounting Standards (AS):
“A mode of conduct imposed on an accountant by custom, law and a professional body.” – By Kohler
Nature of accounting standards:
- Accounting standards are guidelines which provide the framework credible financial statement can be produced.
- According to change in business environment accounting standards are being changed or revised from time to time
- To bring uniformity in accounting practices and to ensure consistency and comparability is the main objective of accounting standards.
- Where the alternative accounting practice is available, an enterprise is free to adopt. So accounting standards are flexible.
- Accounting standards are amendatory in nature.
Utility of accounting standards:
- They provide the norms on the basis of which financial statements should be prepared.
- It creates the confidence among the users of accounting information because they are reliable.
- It helps accountants to follow the uniform accounting practices and helps auditors in auditing.
- It ensures the uniformity in preparation and presentation of financial statements by following the uniform practices.
International Financial Reporting Standards (IFRS):
To maintain uniformity and use of same or single accounting standards, International Financial Reporting Standards (IFRS) are developed by International Accounting Standards board (IASB).
Objectives of IASB:
- To develop the single set of high quality global accounting standards so users of information can make good decisions and the information can be comparable globally.
- To promote the use of these high quality standards.
- To fulfill the special needs of small and medium size entity by following above objectives.
Meaning of IFRS:
IFRS is a principle based accounting standards. IFRS are a single set of high quality accounting Standards developed by IASB, recommended to be used by the enterprises globally to produce financial statements.
Benefits of IFRS:
- Global comparison of financial statements of any companies is possible
- Financial statements prepared by using IFRS shall be better understood with financial statements prepared by the country specific accounting standards. So the investors can make better decision about their investments.
- Industry can raise or invest their funds by better understanding if financial statements are there with IFRS.
- Accountants and auditors are in a position to render their services in countries adopting IFRS.
- By implementation of IFRS accountants and auditors can save the time and money.
- Firm using IFRS can have better planning and execution. It will help the management to execute their plans globally.
INDIAN ACCOUNTING STANDARDS (Ind-AS) India, instead of adopting IFRS, decided to prepare its own accounting standards equivalent to IFRS. Thus, Ind-AS can be said to be converged standards of IFRS. These accounting standards are known as Indian Accounting Standards (Ind-AS).
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Accounts Chapter List
1. Introduction to Accounting
2. Theory Base of Accounting
3. Recording of transaction-I
4. Recording of transaction-II
5. Bank Reconciliation Statement
6. Trial Balance and Rectification of Errors
7. Depreciation, Provisions and Reserves
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