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ACCOUNTING PRINCIPLES
General guidelines for preparing accounting statements.
Accepted by accountants all over the world.
ACCOUNTING Principles
Business Entity Concept
Money Measurement Concept
Going Concern Concept
Accounting Period Concept
Cost Concept
Double Entry Concept
Business is treated as a unit separate
and distinct from its owners.
Transactions are recorded from the
business point of view.
Owners are considered creditors of the
business to the extent of their capital
BUSINESS ENTITY CONCEPT
This gives rise to elements like
‘interest on capital’ and ‘drawings’.
Contd..
GOING CONCERN CONCEPT
Business is assumed to exist for
indefinite period.
Transactions are recorded on assumption
that it is a continuing enterprise.
On the basis of this concept fixed assets
are recorded at original cost and
depreciation is charged till it is being
used.
Contd..
For e.g. machine purchased is expected
to last over 10 years
The original cost of machine will be
spread over next 10 years
Full cost of machine will not be treated
as an expense in the year of purchase.
Transactions and events that can be
expressed in money terms are recorded.
Transactions are recorded through
common denominator, i.e. money.
MONEY MEASUREMENT CONCEPT
Qualitative aspects such as loyalty of
employees, Increased competition etc
can not be recorded.
Contd..
In accounting all the transactions are
recorded at cost and not at market value.
It is systematically reduced by charging
depreciation.
COST CONCEPT
ILLUSTRATION
Land acquire for business = Rs.2,00,000Market value of land rises to = Rs.5,00,000
The amount shown in balance sheet would be Rs.2,00,000
If an asset is acquired and nothing is
paid, it is not recorded.
For e.g. Goodwill is recorded only when it
is purchased.
Financial statements are not influenced
by personal judgments.
Contd..
The users of financial statements need
to know the results of business at
frequent intervals.
Twelve month period is usually adopted
ACCOUNTING PERIOD CONCEPT
According to income tax law, it is
compulsory to adopt financial year
beginning 1st April and ending 31st march
of next calendar year, as its accounting
period.
Companies whose shares are listed are
required to publish quarterly results.
DOUBLE ENTRY CONCEPT
•Every business transaction has a dual
aspect.
•Every transaction affects at least two
accounts.
•Two sides of balance sheet are always
equal:
Assets = Capital + Liabilities
ILLUSTRATION
Purchase goods on credit for Rs.30,000
Assets = Capital + Liabilities
30,000 = 0 + 30,000