Class 11 Accounts Solutions English Medium

MEANING AND NATURE OF ACCOUNTING PRINCIPLES -

“ principles of accounting are general law or rule adopted or proposed as a guide to action, a settled ground or basis of conduct or practice. “

              -The American Institute of Certified Accountants.

In simple words, accounting principles are general law or rules which are generally adopted and accepted by accountants while they recording financial transactions.

FEATURERS OF ACCOUNTING PRINCIPLES –

(i)  Accounting principles are man-made.

(ii) Accounting principles are flexible. Accounting principles are not permanent it can be change with time.

(iii) Accounting principles are generally accepted

THE FUNDAMENTAL ACCOUNTING ASSUMPTIONS –

1. GOING CONCERN ASSUMPTION –

• According to this assumption, it is assumed that business shall continue for a foreseeable period and there is no intention to close the business.  
• This implies that business will not be closed or dissolved in near future unless there is a clear evidence of closer.
• On the basis of this concept, fixed assets are recorded at their original cost not at market price and depreciated in systematic manner.
• Because of this concept, difference between capital expenditure and revenue expenditure are made.

2. CONSISTANCY ASSUMPTION –

• According to this assumption, accounting practices once selected or adopted, should applied consistantly year after year.
• In simple words it means that once a accounting methods or practices selected or adopted, should be used for long period.
• This concept helps in better understanding, comparisssion of results.
• For example, there has two methods of depriciation first is WDV and second is straight line method which is used mostly. than this principle says if you adopt any of them than appiy it for long term. not change it again and again.

3. ACCRUAL ASSSUMPTION -

• According to this assumption, a transaction should be recorded in the books of accounts when it is entered into not when the settlement take place.
• in simple words, this assumption says a transaction should be recorded in the books of accounts when it is entered into whether it is cash transaction or credit transaction.
• terms like prepaid expenses, outstanding expenses, accrued incomes are arise because of this assumption.       

Basic Accounting Concepts or principles

The basic accounting concepts are referred to as the fundamental ideas or basic assumptions underlying the theory and practice of financial accounting and are broad working rules for all accounting activities and developed by the accounting profession. The important concepts have been listed as below:
• Business entity;
• Money measurement;
• Going concern;
• Accounting period;
• Cost
• Dual aspect (or Duality);
• Revenue recognition (Realisation);
• Matching;
• Full disclosure;
• Consistency;
• Conservatism (Prudence);
• Materiality;
• Objectivity

Business Entity Conceptn or principle : 

• The concept of business entity assumes that business has a distinct and separate entity from its owners.
• in other words, It means that for the purposes of accounting, the business and its owners are to be treated as two separate entities.
• therefore, finacial transactions are recorded in the books of accounts from business point of view not owner point of view.
• for example: when a person brings in some money as capital into his business, in accounting records, it is treated as liability of the business to the owner.  

Money Measurement Concept or principle :

• The concept of money measurement states that only those transactions and happenings in an organisation which can be expressed in terms of money are to be recorded in the book of accounts.
• In other words this principle says that only those transactions should be recorded in the books of accounts which can be measures in the terms of money.
• Will not be recorded in the book of Accounting: All such transactions or happenings which can not be expressed in monetary terms, for example, the appointment of a manager, capabilities of its human resources or creativity of its research department or image of the organisation among people in general do not find a place in the accounting records of a firm. 

Accounting Period Concept or principle :

• According to this principle life of an enterprise is broken into smaller periods so that its performance is measured at regular interval.
• Accounting period refers to the span of time at the end of which the financial statements of an enterprise are prepared, to know whether it has earned profits or incurred losses during that period and what exactly is the position of its assets and liabilities at the end of that period.
• Such information is required by different users at regular interval for various purposes, as no firm can wait for long term to know its financial results as various decisions are to be taken at regular intervals on the basis of such information.
• Because of this principle, financial statements are, therefore, prepared at regular interval, normally after a period of one year, so that timely information is made available to the users. This interval of time is called accounting period.

Cost Concept or historical cost principle :

• The cost concept requires that all assets are recorded in the book of accounts at their purchase price, which includes cost of acquisition, transportation, installation and making the asset ready to use.
• in simple words, market value of an asset may change with passage of time but for the purpose of accounting assets are recorded at their book value.
• For example, an asset is purchased for Rs.8,00,000 and assumes its market value is Rs.5,00,000. therefore at a time of preparing final accounts assets are recorded in the books of accounts at a price of Rs.8,00,000.

Dual Aspect Concept : 

• Dual aspect is the foundation or basic principle of accounting.
• It provides the very basis for recording business transactions in the books of accounts.
• This concept states that every transaction has a dual or two effects and should therefore be recorded at two places.
• In other words, at least two accounts will be involved in recording a transaction.
• The duality principle is commonly expressed in terms of fundamental accounting Equation, which is as follows :

    Assets = Liabilities + Capital 

   In other words, the equation states that the assets of a business are always equal to the claims of owners and the outsiders

• In fact, this concept forms the core of Double Entry System of accounting.

Revenue Recognition :

Revenue is the gross in-flow of cash arising from the sale of goods and services by an enterprise and use by others of the enterprise resources yielding interest royalities and divididends. The concept of revenue
recognition requires that the revenue for a business transaction should be considered realised when a legal right to receive it arises.

Matching :

• This concept is based on the accounting period concept.
• The concept of matching emphasises that expenses incurred in an accounting period should be matched with revenues during that period.
• It follows from this that the revenue and expenses incurred to earn these revenue must belong to the same accounting period.
• In simple words, according to this concept, the expenses for an aaccounting period are matched against related revenues, rather than cash recived and paid to determine correct profit or loss for the accounting period.

Full Disclosure concept :

• This concept requires that all material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements and their accompanying footnotes.

Conservatism or prudence principle :

• According to this principle, Do not anticipate for profits but provide for all posisble loses.  
• This concept requires that business transactions should be recorded in such a manner that profits are not overstated. All anticipated losses should be accounted for but all unrealised gains should be ignored.
• example - povision for bad debts, provision for depriciation.

Materiality :

This concept states that accounting should focus on material facts. If the item is likely to influence the decision of a reasonably prudent investor or creditor, it should be regarded as material, and shown in the
financial statements.

Accounting Standards :

Accounting standards are written statements of uniform accounting rules and guidelines in practice for preparing the uniform and consistent financial statements. These standards cannot over ride the provisions of applicable laws, customs, usages and business environment in the country.