Week 1 - Forum - Vijay's 11 key principles of accounting Flashcards
Entity concept
The owners and the firm are distinct. The firm is recognized as a separate entity. If an owner uses money generated by the firm to meet his personal expenses, then these are treated as receivables by the firm, being a separate entity.
Going concern concept
It is assumed that a firm has a long life. Eg: If a newly acquired asset has 20 years of life, its value is depreciated over 20 years. It is assumed that the firm will continue to exist.
Dual Aspect Concept
For accounting purpose, every business transaction has two aspects to be considered. (i) Receiving aspect and (ii) Giving aspect. The receiving aspect is known as Debit aspect and the giving aspect is known as the Credit aspect of the business.
Money measurement concept
Only transactions that can be measured in monetary terms is accounted . Eg: Human resource capabilities, customer satisfaction etc cannot be measured in monetary terms.
Historical cost concept
The market value of assets may change with time. But for accounting purpose, the assets will be valued at historical cost. If the value of the asset has appreciated, this is not considered. However if the value of the asset has decreased (say due to some damage) and this can be measured accurately, then the reduced value is considered.
Conservatism principle
Profit, gain or income are recognized only if there is a reasonable assurance for realizing them. On the other hand, losses and expenses are recognized immediately when suspected without waiting for any assurance.
Matching principle
All the income earned during an accounting period should be matched with the expenses incurred for earning the income during the period.
Accrual concept
Income and expenses accrued during an accounting period must be accounted. The revenues and expenses are recorded when earned and incurred, regardless of the time cash is received or paid.
Consistency concept
This necessitates that the firm does not alter the basis for accounting inventories, depreciation etc. Eg: Depreciation can be accounted by straight line method or written down value method. Inventory valuation may bebased on FIFO (First in first out) or LIFO (last in first out) or weighted average method. The firm should consistently follow a chosen method.
Materiality concept
Expenses can be classified as Capital expenditure (Buying machinery) and Revenue expenditure (Buying raw materials). The cost of capital items is accounted through the entire useful life of the item. The cost of revenue items is accounted immediately as they are consumed. If the capital expenditure is of low value, based on materiality (significance), it can be accounted immediately instead of over a period of time.
Realization concept
This is also called the revenue recognition principle. Revenue is realized by the seller only when the sale is made whether the customer has paid or not.
