Accounting Principles (Copy)
Matching (Accruals Concept)
- Expenses must be matched to the revenue they help to generate.
- Both income and expenses are recorded in the period they occur, not when cash is received or paid.
- Ensures accurate profit calculation.
Example:
- Rent for December paid in January is still recorded in December’s accounts.
Business Entity Principle
- The business is treated as separate from its owner.
- Only transactions affecting the business are recorded.
- Owner’s personal finances are not included.
Example:
- Owner uses personal money to buy a car → not recorded unless it’s a business asset.
Consistency
- The same accounting methods must be used from one period to another.
- Allows for reliable comparisons between years.
Example:
- If straight-line depreciation is used one year, the same should be applied next year unless justified.
Duality (Dual Aspect)
- Every transaction has two effects – debit and credit.
- Forms the basis of double-entry accounting.
- Maintains the accounting equation:
Assets = Liabilities + Capital
Example:
- Buy goods on credit → Increase inventory (asset), increase trade payables (liability).
Going Concern
- Assumes the business will continue operating in the foreseeable future.
- Assets are valued assuming no liquidation.
- If business is closing, accounts must be prepared differently (e.g. at liquidation values).
Example:
- Machinery is not valued at scrap price, because business is assumed to keep using it.
Historic Cost
- Assets are recorded at their original purchase price.
- Ignores current market value or inflation.
- Ensures objectivity and verifiability, but may understate real worth over time.
Example:
- A plot bought for 500,000 5 years ago is still shown at 500,000 even if now worth 2,000,000.
Materiality
- Only information that is significant enough to affect decisions is included.
- Small amounts that don’t affect overall understanding may be ignored or simplified.
Example:
- A 50 rupee calculator used for 3 years may be recorded as an expense instead of a fixed asset.
Money Measurement
- Only items that can be measured in monetary terms are recorded.
- Non-quantifiable elements are excluded.
Excluded Examples:
- Employee skills
- Brand loyalty
- Working environment
Limitation:
- Important aspects like reputation are not shown in accounts.
Prudence (Conservatism)
- Do not overstate income or assets, and do not understate expenses or liabilities.
- Recognise losses or liabilities as soon as they are expected, but only record income when it is certain.
- Prevents over-optimism in reporting.
Example:
- A doubtful debt is provided for immediately, but expected profit from a sale next year is not recorded yet.
Realisation
- Revenue is recorded when it is earned, not when cash is received.
- Usually at point of delivery of goods or services.
Example:
- A sale made in June, but customer pays in August → revenue is recorded in June.