Theory base of Accounting, Accounting Standards and Indian Accounting Standards (Ind-AS)
Abbreviations used
- ICAI - Institute of Chartered Accountants of India
- IASB - International Accounting Standards Board
- IASC - International Accounting Standards Committee
- IFRB - International Financial Reporting Board
- IFRS - International Financial Reporting Standards
- ASB - Accounting Standards Board
- NFRA - National Financial Reporting Authority
- SIC - Standing Interpretation Committee
- IAS - International Accounting Standards
- IFRIC - International Financial Reporting Interpretations Committee
- Ind-AS - Indian Accounting Standards
Accounting Principles - They are the basic rules that define the parameters and constraints within which accounting operates. These principles are the theory base of accounting, on the basis of which financial statements are prepared.
In other words, They are the guidelines for preparing the financial statements.
Accounting principles, concepts and conventions are commonly known as Generally Accepted Accounting Principles or GAAPs.
Presently, the accounting standards issued by ICAI are applicable on Non-corporate firms and the accounting standards notified under the Companies Act 2013 are applicable and mandatory on companies.
American Institute of Certified Public Accountants defined it as -
Principles of Accounting are the general law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice.
The Accounting Principles are classified into two categories -
- Accounting Concepts
- Accounting Conventions
Accounting Concepts - These are the generally accepted accounting rules based on which transactions are recorded and financial statements are prepared
Accounting Conventions - These are the outcome of accounting practices or principles followed by the enterprises over a period of time.
Fundamental Accounting Assumptions or Concepts
These principles are presumed to be followed in preparing annual accounts. Entities not following any of the fundamental principles are required to disclose the reason for not following that.
Following are the fundamental accounting assumptions recognised by AS-1 -
- Going Concern Assumption
- Consistency Assumption
- Accrual Assumption
Other Accounting principles
- Accounting Entity or Business Entity Principle
- Money Measurement Principle
- Accounting Period Principle
- Full Disclosure Principle
- Materiality Principle
- Prudence or Conservatism Principle
- Cost Concept or Historical Cost Principle
- Matching Concept or Matching Principle
- Dual Aspect or Duality Principle
- Revenue Recognition Principle
- Verifiable Objective Concept
Going Concern Assumption - It prescribes that the business shall continue for a foreseeable period and there is no intention to close the business or scale down its operation significantly.
Consistency Assumption - According to Consistency Assumption, accounting practices once selected and adopted should be applied consistently year after year.
Accrual Assumption - According to Accrual Assumption, a transaction is recorded in the books of account at the time when it entered into and not when the settlement takes place, i.e., revenue is recognised when it is realised.
Accounting Entity or Business Entity Principle - According to Business Entity Principle, business is considered to be separate from its owners.
Owners being regarded as separate from business are considered as creditors of the business to the extent of their capital.
Money Measurement Principle - According to Money Measurement Principle, transactions and events that can be measured in monetary terms are recorded in the books of account.
This principle suffers from the following limitations -
- Events and transactions which can't be measured in monetary terms are not recorded howsoever important they may be to the enterprise. For example - Quality of products, Brand value, etc.
- The value of money is considered to have static value as transactions are recorded at the value on the transaction date and continue to be shown at the recorded value.
Accounting Period Principle - According to the Accounting Period Principle, life of an enterprise is broken into smaller period (usually a year) so that the performance is measured at regular interval.
Full Disclosure Principle - According to the Full Disclosure Principle, there should be a complete and understandable reporting on the financial statements of all significant information relating to the economic affairs of the entity.
Materiality Principle - Materiality Principle refers to the relative importance of an item or an event.
An item should be regarded as material if there is a reason to believe that the knowledge of it would influence the decision of an informed investor.
Prudence or Conservatism Principle - It states taking into consideration all prospective losses but not the prospective profits.
i.e., Do not anticipate a profit, but provide for all possible losses.
Cost Concept or Historical Cost Principle - According to this concept, an asset is recorded in the books of account at the price paid to acquire it, i.e., Historical Cost but is systematically reduced by charging depreciation.
Cost concept brings objectivity in the preparation and presentation of financial statements as they are not influenced by the personal bias or judgement.
Matching Concept or Matching Principle - According to this principle, expenses incurred to earn the revenue should be recognised as expense in the year revenue is recognised.
Dual Aspect or Duality Principle- It states that every transaction entered into the books of account has two aspects 'debit' and 'credit' of equal amount.
The system of Double Entry Book Keeping is based on this principle.
Revenue Recognition Concept - According to this concept, revenue is considered to have been realised when a transaction has been entered into and the obligation to receive the amount is established.
It does not depend whether the amount is paid or not.
Verifiable Objective Concept - According to this concept, transactions are recorded on the basis of evidence such as cash memo, invoices, sales bill, etc.
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