Accounting Principles Explained | Tally Solutions

Accounting Principles

  • 1. Introduction
  • 2. Accounting Principles – a brief
  • 3. Accounting Principles Spectrum - A diagrammatic representation
  • 4. Accounting Convention - A derivative study of Accounting Principles
  • 5. Study of Accounting concepts to know about Accounting principles
  • 6. Conclusion

1. Introduction

Accounting is a language of the business. Accounting Financial statements prepared by the accountant, communicate financial information to the various stakeholders for decision-making purpose. Thereby it becomes important that ¬financial statements prepared by different organizations should be prepared on uniform basis.

Apart from this, there should also be consistency over a period of time in the preparation of these financial statements. If every one starts following their own norms and notions for accounting of different items then there will be an utter confusion.

To avoid the chaos and achieve uniformity, accounting process is applied within the conceptual framework of ‘Generally Accepted Accounting Principles’ (GAAPs). These principles are the ground rules, which de¬ne the parameters and constraints within which accounting reports are generated. Principles of Accounting are basic norms and assumptions on which the whole accounting system has been developed and established.

2. Accounting Principles – a Brief

Principles of Accounting are a body of doctrines commonly associated with the theory and procedures of accounting serving as an explanation of current practices and as a tool for selection of conventions or procedures where alternatives exist.”

Accounting principles must satisfy the following conditions

  • They should be based on real assumptions
  • They must be simple, understandable and explanatory
  • They must be followed consistently
  • They should be able to reflect future predictions
  • They should be informational for the users.

3. Accounting Principles Spectrum - A diagrammatic Representation

accounting-principles-spectrum

4. Accounting Convention - A Derivative Study of Accounting Principles

Accounting conventions emerge out of Accounting practices also known as Accounting Principles. These conventions are derived by usage and practice. The accountancy bodies of the world may change any of the convention to improve the quality of accounting information. Accounting conventions need not have universal application.

Accounting Conventions Description
Convention of Consistency
  • The accounting practices/ Accounting Principles should remain unchanged from one period to another.
  • The working rules once chosen should not be changed arbitrarily and without notice of the effect of change to those who use the accounts.
  • For example, Stock in trade should be valued in the same manner every year, and depreciation is charged on fixed assets on the same method year after year.
Convention of Conservatism
  • It takes into consideration all prospective losses
  • Leaves all prospective profits
  • Financial statements are usually drawn up on a conservative basis and anticipated profit are ignored but anticipated losses are taken into account while drawing the statements
  • For example, making the provision for doubtful debts and discount on debtors, Valuation of the stock at cost price or market price which ever is less and so on.
Convention of disclosure
  • All significant information should be disclosed in financial statements.
  • Such disclosures to be made through footnotes to accounts.
  • The need is to communicate all material and relevant facts concerning financial position and results of operations to the users.
  • For example, contingent liability appearing as a note, market value of investments appearing as a note etc.,
Convention of materiality
  • To attach importance to material detail and ignore insignificant details in the financial statement.
  • In materiality principle, all the items having significant economics effect on the business of the enterprises should be disclosed in the financial statement.
  • For example, depreciating small items like books, calculator is taken as 100% in the year if purchase though used by company for more than one year.

5. Study of Accounting Concepts to Know About Accounting Principles

The widely accepted Accounting concepts can be tabulated as under :

Accounting Concept Description
Business/Entity Concept
  • Business/Entity concept states that business enterprise is a separate identity apart from its owner.
  • We should treat a business as distinct from its owner.
  • Transactions related to business are recorded in the business books of accounts and owner’s transactions in his personal books of accounts.
Money measurement concept

Principles of Accounting are a body of doctrines commonly associated with the theory and procedures of accounting serving as an explanation of current practices and as a tool for selection of conventions or procedures where alternatives exist.”

Accounting principles must satisfy the following conditions:

  • Should be based on real assumptions;
  • Must be simple, understandable and explanatory;
  • Must be followed consistently;
  • Should be able to reflect future predictions;
  • Should be informational for the users.
Periodicity Concept
  • This concept states that accounts should be prepared after every period & not at the end of the life of the entity.
  • Usually this period is one calendar year. We generally follow from 1st April of a year to 31st March of the immediately following year.
Accrual Concept
  • Under this concept, the effects of transactions and other events are recognised on mercantile basis i.e., when they occur (and not as cash or a cash equivalent is received or paid)
  • The transactions are recorded in the accounting records and reported in the ­financial statements of the periods to which they relate.
Matching Concept
  • As per this concept, all expenses matched with the revenue of that period should only be taken into consideration in the financial statements of the organization
  • The concept stress on the Accounting principle that if any revenue is recognized then expenses related to earn that revenue should also be recognized.
Going Concern Concept
  • The concept highlights here the Accounting principle that the value of an asset is to be determined on the basis of historical cost in book of accounts
  •  To say it otherwise these should be recorded at, cost of acquisition.
Realisation Concept
  • It borrows the cost concept.
  • Meaning any change in value of an asset is to be recorded only when the business realizes it.
Concept of dual aspect
  • It is the core of double entry book-keeping.
  • Every transaction or event has two aspects :
    • Increases one Asset and decreases other Asset;
    • Increases an Asset and simultaneously increases Liability;
    • It decreases one Asset, increases another Asset;
    • It decreases one Asset, decreases a Liability. And Alternatively:
    • It increases one Liability, decreases other Liability;
    • It increases a Liability, increases an Asset;
    • It decreases Liability, increases other Liability;
    • It decreases Liability, decreases an Asset.

6. Conclusion

At the end, the aim of accounting is to keep systematic records to ascertain ¬financial performance and financial position of an entity and to communicate the relevant ¬financial information to the interested user groups.

The accounting ­financial statements are basic means through which the management of an entity makes public communication of the ­financial information along with selected quantitative details. And such quantitative details could well be maintained with help of ERP Systems such as Tally.ERP 9 following the Accounting Principles laid by statutory organizations.



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