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GENERALLY ACCEPTED ACCOUNTING PRINICIPLES
๏ Generally accepted accounting principles are the set of rules and guidelines adopted for recording and reporting of business transactions, in order to bring uniformity and consistency in the preparation and presentation of financial statements. ๏ These principles have been generally accepted by accountants all over the world. ๏ If the accountants do not adopt the generally accepted accounting principles, the financial statements of different organizations will not be comparable.
FUNDAMENTAL ACCOUNTING
ASSUMPTIONS/CONCEPTS
As per AS-I, issued by the institute of chartered
accountants of India, there are three fundamental
accounting assumptions.
1) Going concern
2) Consistency
3) Accrual
e) Classification of assets and liabilities. The following cases for going concern is not valid:- a) When a business was set up for a particular prepare (Joint venture business). b) When an enterprise has been in the grip of severe financial crisis and is expected to be wind-up shortly. c) When a receiver or liquidator has been appointed in case of a company which is to be liquidated.
2. CONSISTENCY ASSUMPTION
๏ According to this assumption, accounting policies once selected and adopted, should be applied consistently year after year. For example: If the business has been charging depreciation on its fixed assets according to straight line method, it should go on charging depreciation with the same method every year. Consistency make inter-firm or intra-firm comparison. It eliminates personal bias. It is particularly important when alternative accounting practices are available and each equally acceptable.
3. ACCRUAL ASSUMPTION
๏ Accrual assumption applies equally to revenues and expenses. ๏ According to accrual assumption, revenue is recorded when it is earned i.e., sales are made or services are recorded and it is immaterial whether cash is received or not. ๏ Similarly, expenses are recorded in the accounting period in which they assist in earning the measures whether the cash is paid for them or not. ๏ Thus all revenues and expenses are recorded on period basis and not on payment basis.
๏ As a result of the accrual assumption, outstanding expenses, prepaid expense, accrued income, income received in advanced, etc are taken into consideration while preparing final accounts. ๏ It is important to remember that if the fundamental accounting assumptions i.e., going concern, consistency and accrual are followed in financial statements. Specific disclosure is not required, if a fundamental accounting assumption is not followed the fact should be disclosed.
The personal affairs of owners do not appear in the books of accounts. When the personal affairs of the businessman affects the business funds, it will be recorded in the books of business as drawings. Capital invested by owner is treated as liability for the business (internal liability). This concept is applicable for all organizations.
2) MONEY MEASUREMENT CONCEPT
According to this concept only those business transactions are recorded in the books of accounts which can be expressed in terms of money and those transactions which cannot be expressed in terms of money are not recorded in the books of accounts like honesty of the worker, strike by employees, retirement of a manager. Another important aspect of the money measurement concept is that the records of the transactions are to be kept not in physical units but in the monetary unit.
In other words, the period at the end of which the profitability of the business is determined is called accounting period. This accounting period is having of one year and this one year may be calendar year from 1 st January to 31 st December or financial year from 1 st April to 31 st March of the next year. Under companies act, it is compulsory for all the companies to adopt financial year as accounting year. Income tax act also made it compulsory to adopt financial year as an accounting year.
4) COST CONCEPT/HISTORICAL COST
According to this concept all assets are recorded in the books of accounts at cost price, which includes cost of acquisition, transportation and installation and not at its market price. This concept is not applicable to record the value o0f closing stock. Closing stock is recorded at cost price or market price whichever is less. Assets for which nothing is paid will not be recorded. Thus a favourable location, knowledge, technical skills, etc will remain unrecorded though these are valuable assets.
The following accounting equation is based on dual aspect concept. Assets = Liabilities + Capital
6) REVENUE RECOGNITION/REALISATION CONCEPT
The revenue recognition concept guides accountants when to record revenue and the amount of revenue to record. According to revenue recognition concept, revenue is recorded when it is earned i.e., sales are made or services are rendered and it is immaterial whether cash is received or not. Revenue in case of incomes such as rent, interest, commission, etc is recorded on a time basis.
7) MATCHING CONCEPT
This concept is very important for correct determination of profit and loss of the business. According to this concept, the expenses of a given period should be matched with the revenue of the same period. It ensures that revenues and all their associated expenses are recorded in the same accounting period. According to this concept, adjustments should be made for all outstanding expenses, prepaid expenses, accrued incomes,
