Accounting Principles & Conventions | Part-5 Accounting Series [Video]

Accounting Principles:

Accounting principles are the rules that an organization follows when reporting financial information. A number of basic accounting principles have been developed through common usage. They form the basis upon which the complete suite of accounting standards have been built.
Some widely recognized accounting principles are:

Accrual principle: This is the concept that accounting transactions should be recorded in the accounting periods when they actually occur, rather than in the periods when there are cash flows associated with them. This is the foundation of the accrual basis of accounting. It is important for the construction of financial statements that show what actually happened in an accounting period, rather than being artificially delayed or accelerated by the associated cash flows.

Cost principle: This is the concept that a business should only record its assets, liabilities, and equity investments at their original purchase costs. This principle is becoming less valid, as a host of accounting standards are heading in the direction of adjusting assets and liabilities to their fair values.
Economic entity principle: This is the concept that the transactions of a business should be kept separate from those of its owners and other businesses. This prevents intermingling of assets and liabilities among multiple entities, which can cause considerable difficulties when the financial statements of a fledgling business are first audited.

Going concern principle: This is the concept that a business will remain in operation for the foreseeable future. This means that you would be justified in deferring the recognition of some expenses, such as depreciation, until later periods. Otherwise, you would have to recognize all expenses at once and not defer any of them.

Matching principle: This is the concept that, when you record revenue, you should record all related expenses at the same time. This is a cornerstone of the accrual basis of accounting. The cash basis of accounting does not use the matching the principle.

Monetary unit principle: This is the concept that a business should only record transactions that can be stated in terms of a unit of currency. Thus, it is easy enough to record the purchase of a fixed asset, since it was bought for a specific price, whereas the value of the quality control system of a business is not recorded. This concept keeps a business from engaging in an excessive level of estimation in deriving the value of its assets and liabilities.

Reliability principle: This is the concept that only those transactions that can be proven should be recorded. For example, a supplier invoice is solid evidence that an expense has been recorded. This concept is of prime interest to auditors, who are constantly in search of the evidence supporting transactions.
Revenue recognition principle: This is the concept that you should only recognize revenue when the business has substantially completed the earnings process.
Time period principle: This is the concept that a business should report the results of its operations over a standard period of time. This may qualify as the most glaringly obvious of all accounting principles, but is intended to create a standard set of comparable periods, which is useful for trend analysis.

Accounting Conventions
Accounting conventions are guidelines used to help companies determine how to record certain business transactions that have not yet been fully addressed by accounting standards. These procedures and principles are not legally binding but are generally accepted by accounting bodies.

Accounting Convention Methods

Convention of materiality: This convention states that while preparing balanced sheet company should use only those data’s or information which are of outmost important and relevant at that particular point of time. The basic objective is to make the balance sheet as precise as possible so that it can be easily understood and interpreted.

Convention of consistency: This convention states that company should follow the same principle, practices and concepts year after year while preparing balance sheet so that it will be easier in making comparison of current year balance sheet with previous years.
Convention of full disclosure: this convention states that company should fully disclose the real financial condition in its balance sheet and should not hide or manipulate anything otherwise legal action can be taken against the directors of the company.
Convention of Prudence or Convertism: This convention states that company should anticipate maximum possible loses and minimum profit while preparing balance sheet so that the real profit will be more than the profit shown in the balance sheet.

Accounting Principles & Conventions

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