ACCOUNTING PRINCIPLES AND STANDARDS

ACCOUNTING PRINCIPLES AND STANDARDS

Accounting have been defined as an art of recording, classifying and summarizing in significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.

Objectives of Accounting:

·       To provide financial information to stakeholders

·       To ascertain the amount of profit or loss made by the business

·       To know the financial position of the business

·       To provide a record for compliance with statutes and laws applicable

·       To assess the progress made by the business over a period of time

Accounting principles are basic guidelines that provide standards for scientific accounting practices and procedures. Accounting concepts lay down the foundation for accounting principles and ensure recording of financial facts on sound bases and logical considerations. Accounting conventions are methods or procedures that are widely accepted in recording transactions. Accounting standards are written policy documents covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transactions in financial statements.    

Accounting principles:

v Business entity concept: Business is treated as distinct and separate from the individuals who own or manage it. This concept enables recording of transactions of the business entity with its owners or stakeholders.

v Going concern concept: Business is assumed to exist for an indefinite period and is not established with the objective of closing it down. This concept enables to carry forward the values of assets and liabilities from one accounting period to the other thus forming a sound basis for preparation of a Balance sheet.

v Money measurement concept: A business transaction will always be recoded if it can be expressed in terms of money. This concept thus allows different types of transactions to record as homogeneous entries.

v Accounting Period Concept: Business entity is supposed to be paused after a certain interval of time called accounting period usually one year so as to capture and communicate the economic information meaningfully to its stakeholders to assess the performance of the business

v Accrual concept: This concept is based on recognition of both cash and credit transactions.

v Revenue Realisation concept: Revenue should be recorded only when they are earned. Mere getting of an order will not be eligible to recognize as revenue. This concept ensures that unearned or unrealized income will not be considered as revenue.

v Matching concept: Expenses are recorded in the time period when they are incurred to generate revenues. This concept ensures that profits over the certain period of time not to be inflated or deflated.

v Full Disclosure concept: All significant information must be disclosed for the purpose of presenting financial statements to the users thus providing a true and fair view of the state of affairs of firm.      

v Dual Aspect concept: Every business transaction has dual impact on the financial positions – a debit and credit of equal amount.

v Assets= Liabilities+ Capital

v Objectivity Concept: Accounting should be free from personal bias and every transaction must be supported by documentary evidence which can be verified thus displaying reliable information to the users of the accounting data.

v Historical Cost Concept: Business transactions are always recorded at the actual cost at which they are actually undertaken comprising of the cost of acquisition and all the expenditure incurred for making the assets ready to use.

v Materiality concept: This concept states that while accounting transactions only those of which have material effect on profitability must be considered for reporting. The materiality could be related to information, amount, procedure and nature and is of subjective in nature.

v Consistency concept: This concept advocates that accounting practices once adopted by an organization should be consistently applied and be uniform over a period of time thus eliminating the problem associated with comparability of results and performance. However, necessary changes can be adopted in due course of time if needed with proper and full disclosure of information related to such changes.

v Prudence (Conservatism) concept: This concept underlines the prudence of understating than overstating thus takes into account all prospective losses but not the prospective profit.” Anticipate no profits but recognize all losses”.

Accounting standards:

• GAAP-Generally Accepted Accounting Principles: A widely accepted set of rules, conventions, standards, and procedures for reporting financial information established by the Financial Accounting Standards Board are called GAAP. The difficulty with GAAP is that it permits a variety of alternative treatments for the same item thus making the information inconsistent and incomparable. This is rules-based and on historical cost.
• ICAI standards: The Institute of Chartered Accountants of India standardized the accounting policies to bring consistency in the accounting practices which are known as Accounting Standards (AS).
• The ICAI initiated the process of moving towards the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) thus formulating IFRS-converged Indian Accounting Standards (IndAS).
• IFRSs: A set of accounting standards for reporting different types of business transactions and events in the financial statements thus facilitating international comparisons for true and fair valuation of a business enterprise. This is principles based and on fair value.