Accounting Principles: Meaning, Important Principles
Key Points:
1. Meaning of
Accounting Principles.
2. Balance Sheet Principles.
3. Income Statements Principles.
4. General Principles.
1. Meaning of Accounting
Principles –
Accounting principles
refer to the rules and regulations that guide the process or activity for which
general rules and regulations have been formed.
In other words,
Accounting Principles means generally accepted rules providing guidance for
accounting and act as a basis for transaction, which changes along with change
in time.
Accounting Principles
are divided into three parts –
1. Balance Sheet Principles.
2. Income Statements Principles.
3. General Principles.
1. Balance Sheet Principles
–
Balance sheet reflects
that true and fare picture of economic status of an organisation. The main
principles relating to it are as under –
(i) Subject Matter Principles
–
The balance sheet is
divided into liability and assets sides, requiring specific format, and must be
prepared on a specific date. The following items are included -Amount of
capital employed, Amount of Reserve surplus and profit, Amount of long term and
short term liabilities, Amount of outstanding, prepaid, accrued and unearned income,
Amount of fixed assets, Investment method of valuation and its amount, Amount
of current assets, Amount of fictitious assets.
(ii) Principles of
Fixed Assets –
Fixed assets, including
tangible and intangible assets, have a long business period and should be shown
at cost price in the first year and depreciated value thereafter. They should
not be shown on present or market price, and intangible assets should be
written off early.
(iii) Principles of Investment
–
• Investments include
shares, debentures, bonds, government securities, or other institutional
securities.
• Investments in
government securities and companies should be separately valued.
• Investments should be
valued considering cost and market price.
• The method of investment
valuation should be clearly shown.
(iv) Principles of
Current Assets –
Current assets include
investments, stores, loose-tools, trading stock, sundry debtors, bills
receivables, work in progress, and cash in hand. Valuation considers cost price,
market price, and current price. Stock valuation should be clear, and reserves,
funds, or provisions should be recorded alongside current assets. Specific
current assets should be shown separately.
(v) Principles of
Deferred Expenses –
Deferred expenses are
significant revenue expenditures made with the expectation of future profits,
such as heavy advertising costs. These expenses are calculated by dividing the
amount by the expected number of years, and the unabsorbed amount is displayed
on the asset side of the balance sheet.
(vi) Principle of Loan
–
The balance sheet
should include loans taken by businesses, loans from other parties, any
security or guarantee given, and any interest payable on such loans, all of
which should be shown separately.
(vii) Principle of
Current Liabilities –
Current liabilities
should be shown separately in the balance sheet at actual or book value. Bill payable,
outstanding interest on loan, advance income etc. are some current liabilities.
(viii) Principle of Contingent
Liabilities –
When accounting
contingent liabilities, ensure adequate funds are made for repayment, these
liabilities are of adequate and appropriate amount, and they are expected to be
payable in the near future. They should be shown as a footnote in the balance
sheet.
(II) Income Statement Principles:
Income statement is
prepared to calculate income of a certain period. The following principles are
as under –
(i) Fixed Period Principle
–
Fixed Period Principle
in Organizations -
• Every organization
should prepare an income statement or profit and loss account for a specific
period.
• The duration can be a
year or less.
• The statement should
include all income, expenses, gains, or losses.
(ii) Principles of Non-repetitive
Income and Expenses –
According to this
principle, the non-repetitive income & expenses are to be shown in profit
and loss account and the amount to be written off is calculated by dividing the
amount by the expected number of years.
(iii) Principle of
accounting of Cost and Expenses –
According to this
principle, the following items are to be included in cost and expenses –
Operating cost.
Loss of stock in the
period.
Depreciation amount.
Arrangement of loss on
doubtful and other current assets.
(iv) Principle of
Calculation of Net Income –
According to this
principle, profit and loss account or income statement is to be prepared in
such a manner that no adjustment should be left after calculating the profit if
any adjustment is necessary, then adjustment of small amount should be done
from current income and of large amount from the surplus of accrued income.
(III) General Principles:
Principles relating to
solve the general problems of business/ organisation are known as 'General Principles'. The following general principles are as under –
(i) Principle of Clarity-
The principle of
clarity emphasizes the importance of diligent and honest accounting work to
ensure the clear disclosure of important facts and easy understanding of
financial status information.
(ii) Principle of
Fluctuation of Capital and Income Transactions –
Capital fluctuation
transactions and income increases or decreases should be displayed separately,
with limits for changes in the same direction, and all transactions resulting
in capital fluctuations should be clearly defined.
(iii) Principles of
Information regarding Financial Aspect –
Under it, accounting is
done in such a manner that all important and relevant information should be
available easily. The correct earning capacity and actual economic status can
be known by these accounts.
(iv) Principle of
Reliable Historical Accounts –
Accounting should be
reliable and based on customs, with modern techniques included to maintain
reliability. Accounts should be prepared for future analysis and easy
distinction between capital and revenue, ensuring a smooth distinction between
the two.
(v) Principle of
Physical and Financial Information –
All such events are to
be incorporated in accounting, which are useful and important for business and are
helpful in providing necessary physical and financial information related to
the concern.
(vi) Principle of
Equality of item in Time Period –
This principle
indicates the uniformity in the use of items in various periods. According to
this principle, the items, which are used in one period, the same should be
applied for other periods also. In case of any change, it should be mentioned
clearly.
(vii) Principle of
Expressing Transaction in Monetary Form –
When a transaction can
be expressed in monetary terms, it should be documented otherwise, it should be
disregarded, according to the principle of representing transactions in
monetary form.
Conclusion: Hence, from
first entries to final account preparation, accountants are guided by
accounting principles.
Principles of
accounting are divided into two parts as under –
(A) Accounting concepts
(B) Accounting convention
