Accounting is the process of recording financial transactions of a business.
The accounting process includes summarising, analysing, and reporting these transactions to oversight agencies, regulators, and tax collection entities.
Important Accounting Principles
Accounting Concepts refer to the basic assumptions, rules and principles which work as the basis of recording business transactions and preparing accounts.
The main objective of these concepts is to maintain uniformity and consistency in the accounting records. These concepts consisting of the very basis of accounting are as follows
- Business/ Economic entity assumption: This concept assumes that for accounting purposes, the business enterprise and its owner are two separate entities. For example, when the owner invests money in the business, it is recorded as a liability of the business to the owner, similarly, when the owner takes away some business cash/goods for his personal use it is not treated as a business expense.
Thus the business entity concept states that any expenses incurred by the owner from the business for his personal needs will be considered as withdrawal and will be shown in the drawings. External stakeholders like; Government and investors use a company’s financial records to assess its performance. Hence the transactions must reflect the activities of the entity accurately
- Money measurement concept: This concept assumes that all business transactions must be in terms of money, that is in the currency of a country. It is the reason why you have to complete your business bookkeeping for a foreign transaction in Home currency.
This concept helps in recording business transactions uniformly. While this concept guides the accountant on what to record and what not to record, here is a link to a certified account taxation course in Ahmedabad that is sure to guide all the CA aspirants or accounting professionals.
- Going concern concept: It is also referred to as ‘the non-death principle’. This concept states that a business firm will continue to carry out its activities for an indefinite period. This concept helps in the preparation of financial statements also depreciation on a fixed asset is charged based on this concept. It helps the business judge it’s capacity to earn profits in future
- Accounting period concept: As per the accounting period concept, all the transactions are recorded in the books of accounts for a specified period. Hence, goods purchased and sold during a period, rent, salaries etc paid for a period are accounted for and against that period only. It is because of this principle that your balance sheet always reports information as of a certain date and the profit and loss statement encompasses a specific date range. There are also some limitations to this concept like in case of inflation, there will be an overstatement in the net profit. In India accounting period is 1st April to 31st March for every year.
- Accounting cost concept: This concept states that all the assets are recorded in the books of accounts at their purchase price. The effect of the cost concept is that if the business entity doesn’t pay for an asset, that item will not be shown in the books of accounts.
It limits the required amount of research and time to record or report financial information if the cost out weights the benefits. This basic accounting principle is important because it reminds the business owners not to confuse cost with value
- Dual Aspect Concept: Dual Aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts. This concept assumes that every transaction has a dual effect i.e, it affects two accounts on their respective opposite sides.
Therefore, the transaction should be recorded in two places: e.g. a) giving of cash and b) Receiving of goods. Thus, the duality concept is commonly expressed in terms of the fundamental accounting equation
Assets = Liabilities + Capital
- Realisation Concept: This concept states that the revenue from any business transaction should be included in the accounting records only when it is realised. The term realisation means the creation of a legal right to receive money.
For example: Selling goods is realisation, receiving orders is not. In short, the realisation occurs when the goods and services have been sold either for cash or credit. It also refers to the inflow of assets in the form of receivables. This concept helps in making the accounting information more objective. The rule also says that when risk and reward is transferred for goods or services from one person to another then the revenue should be recognised.
- Accrual Concept: The meaning of accrual is something that becomes due, especially an amount of money that is yet to be paid or received at the end of the accounting period. It means that revenues are recognised when they are receivable.
It helps in knowing about the actual income and actual expenses during a particular period, which in turn helps in calculating the net profit of a business
Here is the link to an Account class in Ahmedabad, that is sure to turn out profitable for all CA aspirants or accounting professionals
- Matching concept: The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. It guides on how the expenses should be matched with revenue for determining the exact profit and loss for a particular period.
It is a very important concept for the investors/shareholders as it helps to know about the exact profit and loss of a business. This principle works with the revenue recognition principle ensuring all the revenues and expenses are recorded on the accrual basis
- Principle of Conservatism: When there is more than one acceptable way to record a transaction, the principle of Conservatism instructs the accountant to record the expenses and liabilities as soon as possible. Using the principle the accountant will be more likely to anticipate losses in the reports
Here is a link to an Accounting Certificate course in Ahmedabad, that will train you to anticipate the losses in an even better way