What are the basic principles of accounting?
Answers
Answer:
Principles of accounting can also refer to the basic or fundamental principles of accounting: cost principle, matching principle, full disclosure principle, revenue recognition principle, going concern assumption, economic entity assumption, and so on.
Answer:
Principles of accounting can also refer to the basic or fundamental principles of accounting: cost principle, matching principle, full disclosure principle, revenue recognition principle, going concern assumption, economic entity assumption, and so on.
Explanation:
Accounting Principles Definition:
Accounting principles are uniform practices which entities follow to record, prepare and present financial statements. An entity must prepare its financial statements as per acceptable accounting principles in order to present true and fair view of state of affairs of entity.
In India, general accounting principles are accounting standards and Indian Accounting Standards.
Uniform accounting principles assist in comparison of financial statement of entities. If accounting principles followed are same then reader of financial statements can compare financial results of two entities. However, if separate entities follow different accounting principles, they should at first prepare financials as per same accounting principles and then reader should make a comparison.
Accounting Principles
Benefits of accounting principles given in Accounting Standards or Indian Accounting Standards (Ind AS):
Accounting principles given in Accounting Standards (AS) and Indian Accounting Standards (Ind AS) are of great importance as it provides the basis for:
1. Recognition of an item as income, expense, asset or liability
2. At what amount it shall be recognised in the books of accounts and
3. How to present these items in statement of P&L or Balance sheet
4. It also provides what all disclosures are required to be made with respect to the items recognised.
Accounting principles guide entities on preparation and presentation of financial statements. It reduces the inconsistencies, presents true and fair view of state of affairs and makes comparison easier.
Key accounting principles are:
• Accrual Principle:
This is the concept that accounting transactions should be recorded in the accounting periods when they actually occur, rather than in the periods when there are cash flows associated with them.
• Conservative Principle:
This is the concept that you should record expenses and liabilities as soon as possible, but to record revenues and assets only when you are sure that they will occur.
• Consistency Principle:
This is the concept that, once you adopt an accounting principle or method, you should continue to use it until a demonstrably better principle or method comes along.
• Going Concern Principle:
As per this concept, an entity has an intention to continue its operation for foreseeable future.
• Matching Principle:
Matching principle states that expenses should be recognized and recorded when those expenses can be matched with the revenues derived from incurring those expenses.
• Revenue Recognition Principle:
As per this principle, revenue should be recognised when they are and not when the amount is received. These principles are clearly given in Accounting Standard 9 (Revenue Recognition).
Accounting Principles are different from accounting policies:
Accounting principles are different from accounting policies. Per se, accounting principles are broader than accounting policies. Accounting principle has been defined above. Accounting policies are accounting principles used in preparing, presenting and disclosing one specific item.
For instance, depreciation is an accounting principle of amortising the amount of tangible asset. Now depreciation can be charged by Straight Line Method (SLM), Written Down Value (WDV) method, etc. Depreciation of tangible asset is an accounting principle whereas following SLM method for depreciation is an accounting policy.
An entity incurred an expense on purchase of a machinery, whose benefit entity will have for the next 5 years. In such case, entire expense should not be charged in the first year, it will be matched with the benefits derived from such asset over 5 years. Now, entity can either follow a policy to charge depreciation at Straight Line Method (SLM) or Written Down Vale (WDV). If entity’s benefits flow in a straight line it can charge depreciation in a SLM. But, if the benefits will be higher in the starting years, entity can charge depreciation using the WDV method.
Accounting principles are the basis on which financial statements are prepared. Uniformity in accounting principles is a key for a reader to read and compare financial statements of two entities.
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