Thursday, September 11, 2014

Accounting assumptions, Concepts and Principles

Accounting is called as language of the business. This language has certain assumptions, concepts, and principles which are necessary for all interested parties to know to understand accounting results of the company. First we shall learn about assumptions which are like pillars. 
1) Business is an entity separate from the owners/creditors etc. By this logic owner’s capital is credit to the company. This is Accounting Entity Assumption.
2) Only financial transactions and events get recorded in accounting. This is Money Measurement Assumption
3) Users of the financial reports are interested in periodical reports because they want to know financial position for certain period by certain date. This is Accounting period principle. 4) Business shall go on without winding it up in foreseeable future is the assumption while recording transaction. This is Going Concern Assumption. In accounting there are certain concepts which guide recording of business transactions. Assumptions given above have given rise to following concepts
 1. All business transactions are recorded in TWO aspects. When business acquires asset, it is receiving benefit but it must pay which is giving benefit. This is called Dual aspect principle which is the basis for Double Entry System of book-keeping.
 2. Any revenue is recognized as income earned on a date only when it is realized. This is Revenue Realisation (Recognition) Concept. Certificate in Accounting Fundamentals L1 TCS Business Domain Academy Page 16 of 18 Unrealised revenue should not be considered as it may inflate income and hence profits.
 3. All the assets are recorded at their acquisition price and further accounting treatment is based on this cost. For example land bought at Rs. 500,000 might fetch Rs. 800,000 at the time of preparing statements but figure shown will be Rs.500000 and not 800000. This is historical cost concept.
 4. All revenues earned are matched with expenses (cost) during a given accounting period to come to the final financial position. This is matching concept. This concept helps in determining accurate profit forgiven period.
 5. Various interested parties expect full and complete disclosure so that they can make rational decision. This is Full Disclosure Concept.
 6. For each business transaction in the books of accounts should have adequate evidence to support it and free from any bias. This is Verifiable and Objective Evidence Concept. Above principles and concepts can be modified, using modifying principles given below.
  1. Cost of applying principle should not be more than the benefit derived from it. If cost is more than benefit then that principle may be modified. This is cost – benefit principle. 2. All relatively relevant information should be disclosed in the financial statement. Insignificant and immaterial information should be left out. This is materiality principle.
  3. The rules, practices, concepts and principles used in accounting by a firm should be applied year after year consistently to ensure comparability of financial statements. For example if company uses “straight line depreciation” method in the first year, it should use it consistently for forthcoming years. This is Consistency principle.
  4. Consider all prospective losses but leave all prospective profits. This is Prudence principle .The essence is ‘“anticipate no profit and provide for all possible losses”. For example, while valuing stocks, market price or cost price whichever is less should be considered.

Accounting Standards
To promote world-wide uniformity in published accounts, the Certificate in Accounting Fundamentals L1 TCS Business Domain Academy Page 17 of 18 International Accounting Standards Committee (IASC) was set up in 1973 to formulate and publish standards (International Accounting Standards-IAS) to be observed in presentation of financial statements for world-wide uniformity. IASC minimizes differences in accounting practices across countries. IASC became IASB (B for Board) in 2003. Since then, the IASB has amended some IASs/replaced some IASs with new International Financial Reporting Standards (IFRSs)/proposed certain new IFRSs on topics for which there was no previous IAS.In our country the Institute of Chartered Accountants of India (ICAI) has constituted Accounting Standard Board (ASB) in 1977. The ASB has been empowered to formulate and issue accounting standards.
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