2.1.1
Accounting Entity Assumption
According
to this assumption, a business is treated as a unit or entity
apart
from its owners, creditors, and others. In other words, the
proprietor
of a business concern is always considered to be separate
and
distinct from the business which he controls. All the business
transactions
are recorded in the books of accounts from the viewpoint
of
the business. Even the proprietor is treated as a creditor to the
extent
of his capital.
2.1.2
Money Measurement Assumption
In
accounting, only those business transactions and events which
are
of financial nature are recorded. For example, when the Sales Manager
is
not on good terms with the Production Manager, the business is bound
to
suffer. This fact will not be recorded, because it cannot be measured
in
terms of money.
2.1.3
Accounting Period Assumption
The
users of financial statements need periodical reports to know
the
operational result and the financial position of the business concern.
Hence
it becomes necessary to close the accounts at regular intervals.
Usually,
a period of 365 days or 52 weeks, or 1 year is considered as
the
accounting period.
2.1.4
Going Concern Assumption
As
per this assumption, the business will exist for a long period
and
transactions are recorded from this point of view. There is neither
the
intention nor the necessity to wind up the business in the foreseeable
future.
2.2
Basic Concepts of Accounting
These
concepts guide how business transactions are reported.
On
the basis of the above four assumptions the following concepts
(principles)
of accounting have been developed.
2.2.1
Dual Aspect Concept
The dual aspect principle is the basis for the Double Entry System of
book-keeping.
All business transactions recorded in accounts have two
aspects
- receiving benefit and giving benefit. For example, when a
business
acquires an asset (receiving of benefit) it must pay cash (giving
of
benefit).
2.2.2
Revenue Realization Concept
According
to this concept, revenue is considered as the income
earned
on the date when it is realized. Unearned or unrealized revenue
should
not be taken into account. The realization concept is vital for
determining
income pertaining to an accounting period. It avoids the
possibility
of inflating incomes and profits.
2.2.3
Historical Cost Concept
Under
this concept, assets are recorded at the price paid to acquire
them
and this cost is the basis for all subsequent accounting for the
asset.
For example, if a piece of land is purchased for Rs.5,00,000 and
its
market value is Rs.8,00,000 at the time of preparing final accounts
the
land value is recorded only for Rs.5,00,000. Thus, the balance
sheet
does not indicate the price at which the asset could be sold for.
2.2.4
Matching Concept
Matching
the revenues earned during an accounting period with
the
cost associated with the period to ascertain the result of the business
the concern
is called the matching concept. It is the basis for finding accurate
profit
for a period that can be safely distributed to the owners.
2.2.5
Full Disclosure Concept
Accounting
statements should disclose fully and completely all the
significant information. Based on this, decisions can
be taken by various
interested parties. It involves proper classification
and explanations of
accounting information that is published in the
financial statements.
2.2.6
Verifiable and Objective Evidence Concept
This
principle requires that each recorded business transaction in
the
books of accounts should have adequate evidence to support it.
For
example, cash receipts for payments made. The documentary
evidence
of transactions should be free from any bias. As accounting
records
are based on documentary evidence which is capable of
verification,
it is universally acceptable.
2.3
Modifying Principles
To
make the accounting information useful to various interested
parties,
the basic assumptions and concepts discussed earlier have been
modified.
These modifying principles are as under.
2.3.1
Cost-Benefit Principle
This
modifying principle states that the cost of applying a principle
should
not be more than the benefit derived from it. If the cost is more
than
the benefit then that principle should be modified.
2.3.2
Materiality Principle
The
materiality principle requires all relatively relevant information
should
be disclosed in the financial statements. Unimportant and
immaterial
information is either left out or merged with other items.
2.3.3
Consistency Principle
The
aim of the consistency principle is to preserve the comparability
of
financial statements. The rules, practices, concepts, and principles
used
in accounting should be continuously observed and applied year
after
year. Comparisons of financial results of the business among
different
accounting periods can be significant and meaningful only when
consistent
practices were followed in ascertaining them. For example,
depreciation
of assets can be provided under different methods,
whichever
method is followed, should be followed regularly.
2.3.4
Prudence (Conservatism) Principle
Prudence
principle takes into consideration all prospective losses
but
leaves all prospective profits. The essence of this principle is
“Anticipate
no profit and provide for all possible losses”. For example,
while
valuing stock in trade, market price or cost price whichever is
less is considered.
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