Basic Principles

• Business Entity Concept

  • A firm is treated as a unit separate and distinct from its owners.
  • A completely separate set of books is kept for the firm and business transactions are recorded from the firm's point of view.
  • Important for ascertaining the true net profit and financial position of a firm.
• Going Concern Concept

  • Transactions are recorded on the assumption that the business will exist for an indefinite period of time.
  • Hence, a distinction is made between capital expenditure and revenue expenditure.
  • Fixed assets are recorded at their original cost, less depreciation. Market value is not recorded as they will not be sold.
• Money Measurement Concept

  • Only those transactions are recorded which can be expressed/measured in monetary terms.
  • An event, however important, will not be recorded except in terms of money.
• Accounting Period Concept

  • Financial statements are prepared at regular intervals, usually 1 year.
  • The net profit/loss is ascertained separately for each accounting period.
  • Under tax laws, the period is from 1st April to 31st March
• Matching Principle

  • The cost of a particular period should be charged from the same period.
  • Only such matching of cost and revenue can reveal the true profit and loss for that period.
• Dual Aspect Principle

  • Every debit has a corresponding and equal credit.
  • There must be a giver of benefit and also a receiver.
  • It is due to this that the accounting equation is always true: Capital = Assets-Liabilities.
• Full Disclosure Principle

  • Accounts should be prepared in a way that all material information required by users of financial statements is clearly disclosed.
  • No material facts should be concealed.
• Revenue Principle

  The revenue should be treated as realized whenever the ownership of goods changes.
• Expense Principle

  Expenses should be recognized whenever occurred, irrespective of whether cash is paid or not.
• Realization Principle

  • Revenue is deemed to be realized when goods have been transferred or services have been rendered to a customer.
  • In realization of revenue, the receipt of cash is not insignificant.