Accounting Assumptions or Concepts-
For making the accounting language convey the same meaning to all people and to make it more meaningful, most of the accountants have agreed on a number of concepts which are usually followed for preparing the financial statements. These concepts provide a foundation for accounting process. Following may be treated as basic concepts or assumptions:-
The concept is that a company or other entity will be able to continue operating for a period of time that is sufficient to carry out its commitments, obligations, objectives, and so on.
It states that, once you adopt an accounting principle or method, continue to follow its consistency in future accounting periods. But, if the accountant want to change the method for better disclosure than he should mention it by the way of footnotes.
This is an accounting concept which requires recording revenue when they are earned and not when they are received in cash, and recording expenses when they are incurred and not when they are paid.
Now these days, with the extension of scope of accounting it is necessary that the accounting statements should be prepared according to some standard language and set rules. These rules are usually called ‘Generally accepted Accounting principles’. These principles are generally accepted by accountants all over the world as general guidelines for preparing the accounting statements. Following are some basic principles of accounting;-
- Business Entity Principle-
In accounting, a business or an organization and its owners are treated as two separately identifiable parties. This is known as business entity principle.
- Money Measurement Principle-
It underlines the fact that in accounting only those transactions and events are recorded which are capable of being expressed in terms of money.
- Accounting Period Principle-
It relate to the accounting guideline that allows the accountant to divide up the complex, ongoing activities of a business into periods of a year, quarter, month, week etc.
- Principle of Full Disclosure-
This principle requires that all significant information relating to the business or economic affairs of the enterprise should be completely disclosed.
- Principle of Materiality-
It is the principle in accounting that trivial matters are to be disregarded, and all important matters are to be disclosed. Items that are large enough to matter are material items.
- Principle of Conservatism-
It is also known as principle of prudence. This is an accounting principle that requires an accountant to record liabilities and expenses as soon as they occur, but revenues only when they are assured or realized.
- Historical Cost Principle-
This principle requires that assets will be recorded at the cash amount or its equivalent at which it was acquired.
The matching principle states that all expenses must be matched in the same accounting period as the revenues they helped to earn. In practice, matching is a combination of accrual accounting and the revenue recognition concept.
According to this principle, every business transaction is recorded as having a dual aspect. In other words, every transaction affects at least two accounts. If one account id debited, any other account must be credited.