ACCOUNTING PRINCIPLES  General guidelines for preparing accounting statements.  Accepted by accountants all over the world.

ACCOUNTING Principles  Business Entity Concept  Money Measurement Concept  Going Concern Concept  Accounting Period Concept  Cost Concept  Double Entry Concept

 Business is treated as a unit separate and distinct from its owners.  Transactions are recorded from the business point of view.  Owners are considered creditors of the business to the extent of their capital BUSINESS ENTITY CONCEPT

 This gives rise to elements like ‘interest on capital’ and ‘drawings’. Contd..

GOING CONCERN CONCEPT BBusiness is assumed to exist for indefinite period. TTransactions are recorded on assumption that it is a continuing enterprise.

 On the basis of this concept fixed assets are recorded at original cost and depreciation is charged till it is being used. Contd..

For e.g. machine purchased is expected to last over 10 years  The original cost of machine will be spread over next 10 years  Full cost of machine will not be treated as an expense in the year of purchase.

 Transactions and events that can be expressed in money terms are recorded.  Transactions are recorded through common denominator, i.e. money. MONEY MEASUREMENT CONCEPT

 Qualitative aspects such as loyalty of employees, Increased competition etc can not be recorded. Contd..

 In accounting all the transactions are recorded at cost and not at market value.  It is systematically reduced by charging depreciation. COST CONCEPT

ILLUSTRATION Land acquire for business = Rs.2,00,000 Market value of land rises to = Rs.5,00,000 The amount shown in balance sheet would be Rs.2,00,000

 If an asset is acquired and nothing is paid, it is not recorded. For e.g. Goodwill is recorded only when it is purchased.  Financial statements are not influenced by personal judgments. Contd..

 The users of financial statements need to know the results of business at frequent intervals.  Twelve month period is usually adopted ACCOUNTING PERIOD CONCEPT

 According to income tax law, it is compulsory to adopt financial year beginning 1 st April and ending 31 st march of next calendar year, as its accounting period.  Companies whose shares are listed are required to publish quarterly results.

DOUBLE ENTRY CONCEPT Every business transaction has a dual aspect. Every transaction affects at least two accounts. Two sides of balance sheet are always equal: Assets = Capital + Liabilities

ILLUSTRATION Purchase goods on credit for Rs.30,000 Assets = Capital + Liabilities 30,000 = ,000