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ACCOUNTING PRINCIPLES

The preparation of Income Statement and Balance Sheet of a buine ibaed on certain aumption! Thee aumption are called Accountin"Concept#Principle!

Accountin" concept are $er% helpful in appl%in" commonl% etablihedprocedure in preparin" financial tatement!

Ober$ance of accountin" principle ma&e accountin" record andinformation 'reult( true and fair) ma&in" them reliable) realitic andundertandable!

*! Goin" Concern Concept

Account are &ept under the aumption that the buine +ill continue to

operate in the foreeeable future 'a far a one can predict(! Therefore)there i no intention of cloin" do+n!

Thi concept ma% not be applied if there are e$idence or conditionre,uirin" the ceain" of buine - for e.ample peritent loe orli,uidit% problem!

Implication

Aet are $alued at hitorical cot le a""re"ate depreciation and not atdipoable $alue ince there i no intention to dipoe of them!

/! 0itorical Cot Concept

Tranaction are recorded in term of the actual amount at +hich the%occurred in the pat!

Thi concept ha the ad$anta"e of bein" ob1ecti$e! The amount at +hich

a tranaction too& place cannot be diputed o$er +hich i alo theamount found on the document 'e!"! in$oice( iued or recei$ed durin"the tranaction!

Thi concept) therefore) eliminate ub1ecti$it% aociated +ith $aluationin accountin" record!

Implication

Aet and e.pene are recorded at the actual amount pent! Re$enue

are recorded at actual amount recei$ed# recei$able! Liabilitie arerecorded at actual amount borro+ed) therefore) pa%able!

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2! Buine Entit% alo &no+n a Accountin" Entit% Concept

The o+ner and the buine are conidered a t+o different peron)ditinct from each other! The buine unit i eparate and anindependent bod% from it o+ner!

Tranaction are recorded from the point of $ie+ of the buine and notthe o+ner! A uch) an% amount in$eted b% the o+ner in the buine iconidered a a liabilit% b% the buine!

Alo) onl% thoe tranaction that concern the buine are recorded!

Implication

Peronal tranaction and pri$ate propert% of the o+ner are not recordedin the boo&!

Capital and 3ra+in" account are &ept to record amount the o+ner"i$e to or ta&e from the buine!

4! 5one% 5eaurement Concept

Onl% thoe tranaction that can be e.preed in monetar% term'financial tranaction( are recorded in the boo&!

Non6financial tranaction are therefore not recorded!

Implication

Some tren"th or benefit of the buine ma% not be reflected in theboo& ince the% cannot be e.preed in mone% term - e.ample are,ualit% of +or& force and mar&et hare!

7! Accountin" Period#8ear Concept

Accordin" to thi concept) the lifepan of a buine i di$ided into fi.edperiod of time 'month) ,uarter) half6%ear or %ear( for +hich accountare prepared!

In mot cae an accountin" period i a %ear! Note that the accountin"%ear need not be the ame a the calendar %ear! 9or e.ample) theaccountin" %ear for buine : can be from * ;une to 2* 5a%) forbuine B from * September to 2* Au"ut or for buine C from * Aprilto 2* 5arch!

Implication

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Account of the buine are cloed at a pecific date e$er% %ear andfinal account are prepared 'profit# loe calculated(

period) re$enue earned in that period need to be matched a"ainte.pene incurred for that ame period! Thi i done irrepecti$e ofamount recei$ed a re$enue or amount paid for the e.pene!

Implication

Ad1utment are made in account for accrued and prepaid item o thataccount reflect re$enue earned 'not amount recei$ed( and e.peneincurred 'not amount paid for(!

=! Prudence Concept#Coner$atim

Thi concept pre$ent the anticipation of future profit before the% arerealied but re,uire to ma&e pro$iion for loe a oon a the% arereco"nied! Accountin" record hould be maintained on a cautioubai!

Therefore) accordin" to thi concept) aet and re$enue are noto$ertated +hile liabilitie and loe are not undertated!

Implication

In$entor% of "ood are $alued at the lo+er of cot and net realiable$alue!

Pro$iion for doubtful debt are made for potential lo in amount o+edb% credit cutomer!

>! 5aterialit% ConceptThe treatment and recordin" of tranaction depend on it i"nificancein $alue!

Accordin" to thi concept) +hen recordin" tranaction) the accountanthould conider +hether dicloure and non6dicloure of uchtranaction +ill affect the deciion of peron readin" the account!

A claical e.ample here +ould be the +a% an accountant +ill treat a

tapler cotin" ?/ in the account! Thou"h thi item i bou"ht b% a

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buine and +ill be ued for e$eral %ear) it doe not ha$e i"nificant$alue!

Implication

Some item 'tapler) paper clip etc( are not conidered non6current

aet thou"h the% ma% be ued b% the buine for a lon" period of time!Rather) their cot are +ritten off at one a"aint profit in the period the%are bou"ht!

@! Conitenc% Concept

All imilar item need to be "i$en the ame accountin" treatment in theame accountin" period and from one period to another!

Unle there i a $alid reaon) no chan"e are allo+ed in the accountin"

polic% choen! Thi concept epeciall% pre$ent accountant frommanipulatin" the reult of a buine b% impl% chan"in" the accountin"policie

Implication

The ame depreciation method i applied for imilar item in the ameperiod and from one period to another!

*! 3ual Apect ConceptThi concept ta&e into account the t+o apect of accountin"repreented on one ide b% the aet of the buine and on the otherb% the claim a"aint thoe aet!

Thi dualit% i alo e.plained b% the accountin" e,uation a follo+

Aet Capital D Liabilitie

hat a buine o+n i +hat i o+e!Implication

Tranaction are recorded uin" the double entr% %tem +hereb% eachtranaction ha a debit entr% and a correpondin" credit entr%!

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