Accounting principles
Accounting principles are
language of businesses which describe the rules and important concept of
accounting must be followed there on. Accounting principles and its concepts commonly
known as "generally accepted accounting principles" or in simple ‘GAAP’. These are
the rules which defines the ground within accounting operates. The accounting
principles are major factor on which financial accounting are prepared.
Let’s discuss what are the accounting
principles are there:
Separate entity principle or business entity principle
This principle simply describes
the business is to be considered as a separate or distinct entity from its
owner. The work flow and various transaction and event are recorded in business’s
books of account and not in owners books. The owners are known as creditors of
business to the extent of their capital.
Money measurement principle:
This lays down to the
business transaction and event must be measured in terms of money by which we can
easily record it in books of enterprise. Money is the common denominator in
recording and reporting all transaction.
Accounting period principle
According to the accounting
period principle ‘ an accounting period is interval of time at the end of which
income statement i.e. profit and loss and in case of companies statement of profit
and loss and balance sheet are prepared to know the result and resources of business.
Full disclosure principle
As per the full discloser
principle there should be complete and understandable reporting of the
financial statement of all significant information relating to the economic
affairs of the entity.
Materiality principle
the materiality refers to the
importance of an item to be considered. According to the American accounting
association, ‘an item should be regarded as material if there is a reason to believe
that knowledge of it would influence the decision of an informed investor’.
Prudence principle
This principle is describe as
“do not anticipate a profit, but provides for all loses”. This concept ensures
that the financial statement present the realistic picture of economic affairs
of the business or companies and do not glorify the profit as what actually it
is.
Historical cost principle or cost concept
The principle of cost concept
says an asset is recorded in books of account at the price paid to get that
asset. Asset is recorded at the cost at the time of its purchased but is
systematically reduced in value by charging depreciation.
Matching principle
According to matching
principle it necessary to match the revenue of the period with expenses that
period to determine the actual profit or loss for that particular accounting
period. The correct profit earned only be measured by matching the result of
business revenue and the expenses incurred.
Dual aspect principle
This principle signify that
all transaction entered in books of account has dual or two aspect, i.e. debit
and credit of equal amount. The business record their transaction for full
understanding of accounting process by following dual aspect principle.
Revenue recognition concept
This principle clarify that
the revenue is considered to have been realized when transaction has been
entered into and obligation to receive the amount has been established.
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