Accounting principles accountingrevenue.com/accounting-principles.html Sanjoy19
August 3, 2020
Introduction of Accounting Principles : The main objectives of accounting to provide information about the financial performance of a business firm to its various interested groups such as owners, investors, creditors, customers, suppliers. Employees, etc, so that they can make important financial decisions. Thus, it is necessary that the language and terminology of accounting must be standardized, so that there may be uniformity in presenting accounting information. It is obligatory that the accounting information must be reliable and comparable both at the level of inter-firm comparisons and inter-period comparisons. Learning Objectives: Accounting Principles After studying this unit,you will be able to:
Meaning : A business entity Accounting as the language for expressing the results of its financial transactions. The language should convey the same meaning to all. It should help the systemic study of financial affairs. Each language has a basic framework. Accounting also consists of some accounting principle which help to obtain accounting objectives. Every business enterprise prepares its accounts in accordance with some guidelines. These are based on some concepts, conventions, and rules which together comprise accounting principle. Normally a ‘principle’ is a fundamental idea that should be followed universally. But for accounting, principle means some generally accepted rules and guidelines arising out of assumptions made and conventions used. The Committee on Terminology of the American Institute of Certified Public Accountants defines accounting principles as ” a general law or rule adopted or professed as a guide to action; a settled ground or basis of conduct or practice.” The techniques of accounting depending upon the accounting principle.
Necessity of Accounting Principles : Accounting information is better understood if it is prepared following the set of accounting principles uniformly. It means the same Accounting principles are followed by all the entities in preparing their final accounts. 1/5
Accounting information is meaningful and useful for users of accounting information if the accounting records and financial statements are prepared following generally accepted accounting information in standard forms that are understood.
Features of Accounting principles :
Features-of-Accounting-Principles
The features of AP are stated below.
1. Accounting Principle are Man-Made: Accounting principles are man-made and, therefore, do not stand scrutiny like the principles of natural science. They are the best possible suggestions based on practical experiences. They are recommended for use by all enterprises to ensure uniformity and understandability.
2.Accounting Principle are Flexible: Accounting principles are not rigid but flexible. Whenever a situation arises that requires a solution, accounting arrives at a reasonable decision which gradually becomes the accepted Accounting principle. It must be borne in mind that accounting 2/5
principles are not permanent and change with time.
3. Accounting Principle are generally accepted: Accounting Principles are the bases and guide for accounting. These principles are generally accepted. The General acceptance of the Accounting principle usually depends on how it meets the criteria of relevance, objectivity, and feasibility. a. Relevance: Principles will be relevant only if it can satisfy the need of those who use it. The accounting principles should be able to provide useful information to its users else whiles it will fail to serve the purpose. b. Objectivity: A principle should not be influenced by the personal bias and whims of the users, otherwise, its usefulness will be limited and cannot prove to be an objective principle. The cost principles are more effective than the value principle because the latter is based on market prices and personal judgment of the users. c. Feasibility: The accounting principle should be practicable. It should be easy to adopt otherwise their utility will be limited. 4. They evolve out from assumptions made and convention followed in accounting.
Importance of Accounting Principles : 1.Usefulness of accounting data is enhanced. 2.Establishes a greater accountability and transparency. 3.Maintains Consistency. 4.Makes the accounting universally understandable. 5.Provides relevant data. 6.Guidelines to Accounting. 7.Increases Reliability.
Characteristics of Accounting Principles : 1.Have no authoritativeness as universal principles. 2.Accounting principles are still evolving. 3/5
3.Acceptance of principles is dependent on various factors. 4.Accounting principles cannot be validated by reference to natural laws. 5.Accounting principles are not rigid.
Classification : Traditionally, accounting principles were classified into two categories : i. Accounting Concepts and ii. Accounting Conventions The International Accounting Standard (IAS-I) has classified the accounting principles into : I. Fundamental Accounting assumptions (Concepts) and II. Accounting Policies (Conventions)
1.Classification of Accounting Concepts: i. Entity Concepts, ii. Money measurement Concepts, iii. Going Concern Concepts, iv. Accounting Period Concept, v. Accrual Concept, vi. Dual Aspect Concept, vii. Cost Concept, viii. Matching Concept, ix. Realization Concept.
2.Classification of Accounting Conventions: i. Conservatism, ii. Consistency, iii. Materiality, iv. Full Disclosure.
Difference Between Accounting Concepts and Conventions : 1. The main point of difference between accounting concepts and conventions is hat accounting concepts are officially recorded, whereas accounting conventions are not recorded officially and are followed as generally accepted guidelines. 2. Accounting concepts have been established by professional organizations and are standard principles that must be followed when preparing financial accounts. Whereas, conventions are the generally accepted practices that can change and updated over time, depending on the change in the financial landscape. 3. In the case of the accounting concepts, one has to follow all the concepts, there is no choice to leave any. Whereas, in the case of accounting conventions, there is a choice to select a particular concept.
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Meaning : Accounting principles refer to those rules and regulations that are universally followed by the accountants for recording accounting information. They play the role of guidelines for recording and reporting financial transactions. In other words, the accounting principles are the common rules that that are universally adopted by the accountant while compiling the financial statement that is distributed to people outside the business concern.
Features : 1. Accounting Principle is Man-Made: They are the best suggestions based on practice and assumption. They are helpful it used by all enterprises since they ensure uniformity and understandability. 2. Accounting Principles are time-based techniques: Accounting principles may change to improve the quality of accounting information with time. 3. Accounting principles are universally Accepted: Accounting principles are generally accepted guidelines for accounting. The principle becomes generally accepted if it meets three content, relevance, objectivity, and feasibility.
Characteristics : 1. Accounting is the language of business. 2. These principles/rules have been developed with the main aim to maintain uniformity in the accounting practices. 3. Generally, the term � principle� refers to the fundamental belief or a general truth which ance established does not change. 4. Accounting principles are still evolving in nature. 5. Accounting principles can not be validated by reference to natural laws. 6. AICPA stands for the American Institute of Certified Public Accountants. Spread the love
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