Fundamental Accounting Assumptions and Concepts
Going Concern Assumption
Business will continue for a foreseeable future at the same level of operations.
Consistency Assumption
According to the Consistency Assumption, accounting practices once selected and adopted, should be applied constantly year after year.
For example, two methods of charging depreciation, Written Down Value Method and Straight Line Method, are equally acceptable. Under the assumption, methods once chosen and applied should be applied constantly year after year to make the financial statement comparable.
Accurate Assumption
A transaction is recorded in the books of account at the time when it is entered into and not when the settlement takes place.
It is immature whether cash is received or not. Expenses are recognized as expenses in the accounting period in which the revenue related to it is recognized, whether paid is cash or not.
Accounting Principles (Other)
Accounting Entity Or Business Entity Principle
Business is considered to be separate from its owners. Business transactions are recorded in the books of account from the business point of view and not from that of the owner. Owners being regarded as separate from business are considered as creditors of the business to the extent of their capital. Their account with the business is credited with the capital introduced and profit earned during the year, etc., and debated by the drawing made.
Money Management Principle
According to the Money Management Principal, transactions and events that can be measured in money terms are recorded in the books of accounts of the enterprise.
Accounting Period Principle
According to the Accounting Period Principle, life of an enterprise is broken into smaller periods so that its performance is measured at regular intervals. The accounts of an enterprise are maintained following the Going Concern Concept, meaning the enterprise will continue its activities for a foreseeable future. Users of Financial Statements, especially the management and bank, require information from the accounts at regular intervals so that decisions can be taken at the appropriate time.
Full Disclosure Principle
According to the Principal of Full Disclosure, “There should be complete and understandable reporting on the financial statement of all significant information relating to the economic affairs of the entity”. Apart from legal requirements good accounting practice requires all material and significant information to be disclosed.
Materiality Principle
Materiality Principle refers to relative importance of an item or an event. According to the American Accounting Association, “an item should be regarded as material if there is a reason to believe that knowledge of it would influence the decision of an informed investor.”
Prudence or Conservatism Principle
It takes into consideration all prospective losers but not the prospective profits. The application of this concept ensures that the financial statements do not print a better picture than what it actually is.
Cost Concept or Historical Cost Principle
An asset is recorded in the books of account at the price paid to acquire it and the cost is the basis for all subsequent accounting of the asset. Asset is recorded at cost at the time of its purchase but is systematically recorded by charging depreciation. The market value of an asset may change with the passage of time but for accounting purposes it continues to be shown in the books of account at its book value. For example, an asset is purchased for rupees 5,00,000 and if at the time of preparing the final accounts, even if its market value is says, rupees 4,00,000 or rupees 7,00,000, yet the asset shall continue to be shown at its purchase price of rupees 5,00,000.
Marketing Concept or Marketing Principle
It is necessary to match ‘revenues’ of the period with the ‘expenses’ of that period to determine correct profit (or loss) for the accounting period. Profit earned by the business during a period can be correctly measured only when the revenue earned during the period is matched with the expenditure increased to earn that revenue.
Dual Aspect or Duality Principle
Every transaction entered into by an enterprise has two aspects, a debit and credit of equal account. Simply started, for every debit there is a credit of equal amount in one or more accounts. It is also true vice versa.
Revenue Recognition 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 is to be noted that recognising revenue and receipt of an amount are two separate aspects.
Verifiable Objective Concept
The Verifiable Objective Concepts holds that accounting should be free from personal bias. Measurements that are based on verifiable evidence are regarded as objective. It means all accounting transactions should be evidenced and supported by business documents. These supporting documents are cash memo, invoices, sales bills, etc.
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