Question

Discuss in brief the basic principles of accounting.

Explain the basic principles of accounting.

Answer 1

1. The Business Entity Concept: According to this concept, a business firm is treated as a unit separate and distinct from its owners. A completely separate set of books is kept for the firm and business transactions are recorded from the firm's point of view. The capital provided by the owner is treated as a liability of the firm. Interest on capital is treated as an expense of business.
2. The Going Concern Concept: It is assumed that the business will continue to exist for a long time in the future. Transactions are recorded on the assumption that the business will exist for an indefinite period of time. It is on this assumption that a distinction is made between capital expenditure and revenue expenditure. Fixed assets are recorded at their original cost less depreciation. Market value of fixed assets is not recorded, as these assets are not to be sold in the near future.
3. Money Measurement Concept: On the basis of this concept, only those transactions are recorded in accounts which can be expressed in terms of money. In other words, an event, however important it may be to the business, will not be recorded unless its monetary effect can be measured with a fair degree of accuracy.
4. Accounting Period Concept: It is due to this concept that financial statements are prepared at regular intervals, generally one year. This period is called accounting period. The net profit/net loss of business is ascertained separately for each accounting period. Similarly, the financial position of business is ascertained on the last day of an accounting period.
5. The Matching Principle: According to this principle, cost of a particular period should be charged from the revenue of same period only. Only such matching of cost and revenue can reveal the true profit or loss for a period. Revenue must be ascertained first for a period and then the cost of that period should be charged to it. When cost is associated with a particular product or service, revenue earned from that product or service should be matched to its cost.
6. The Dual Aspect Principle: This principle suggests that every debit has a corresponding and equal credit. There must be a giver of benefit and also a receiver of the same.
7. The Complete Disclosure Principle: According to this principle, accounts should be prepared in such a way that all the material information required by users of financial statements is clearly disclosed. Information which occurs after the preparation of Balance Sheet should also be fully disclosed and no material facts should be concealed. The disclosures can be by way of footnotes or annexures to the financial statements.
8. The Revenue Principle: This principle suggests that revenue should be treated as realised whenever the ownership of goods changes. It is immaterial whether the revenue is received in cash or not.
9. The Expense Principle: According to this principle, every cost which is incurred to earn revenue is known as expense. Costs incurred on manufacturing, selling and distributing goods and services are expenses. Expenses should be recognised whenever incurred, irrespective of whether cash is paid or not.
10. The Realisation Principle: According to this principle, revenue is deemed to be realised when the goods have been transferred or the services have been rendered to a customer. In the realisation of revenue, the receipt of cash is not significant. If a firm sells goods in April and receives cash in June, revenue will be considered as realised in April when the goods were sold.