Explain the following Assumptions/Principles of. Accounting.
(i) Prudence Principle (ii) Historical Cost Principle
(iii) Accrual Assumption (iv) Materiality Principle
Answers
Answer:
1. Prudence : As per the Concept of Conservatism, profits are not booked in advance but losses are booked in advance as a provision. And it should be created for all known liabilities and losses even if you don't know the amount of loss. By the principle of prudence profits, losses, assets and liabilities are neither overstated nor understated.
2. Historical Cost Principle: Most assets and liabilities should be recorded at their Historical Cost. It would be material even if the value has increased or decreased significantly over a period of time.
3. Accrual Assumption : Transactions are recorded as soon as they take place. Whether Cash or Cash equivalent has been received or not will not affect the transaction. However it also states that no revenue should be recorded unless it is absolutely certain to occur. Also it is mandatory for company to maintain accouts on accrual basis.
4. Materiality Principle : FS should disclose all items which might influence the decisions of the user of Financial Statements. All important accounting policies taken in consideration while preparing and presenting FS should be disclosed.