Principles of Accounting (Notes)

Grade 11 Accountancy
Principles of Accounting
Business Entity Concept
This concept considers a business unit as a separate entity. Business and
businessman are two separate entities and all the business transactions are
recorded in the books of accounts from business point of view. The personal assets
and liabilities of the owner are, therefore, not considered while recording and
reporting the assets and liabilities of the business. Similarly, personal transactions of
the owner are not recorded in the books of the business, unless it involves inflow or
outflow of business funds.
Dual Aspect Concept

This Concept also known as equivalence concept signifies that every business
transaction has two fold effects or every transaction affects at least two accounts.
This concept is, in fact, the base on which Double Entry System of Book-Keeping is
based. According to this principle, every debit has a corresponding credit. The duality
principle is commonly expressed in terms of fundamental Accounting Equation,
which is as follows :
Assets = Liabilities + Capital
Accounting Period Concept

According to this concept the long life of business is divided into justifiable
accounting periods so as to help businessman to know the results of his investment
during each such period. This period is known as accounting period and the length of
this period depends on the nature of business. Accounting period may be either a
calendar year (From January 1 to December 31) or the financial year (April 1 to
March 31)
Going Concern Concept

This concept assumes that every business has a long and indefinite life. Since
financial statements are prepared on the basis of this concept, all fixed assets are
shown in the books at their cost ignoring their market value. In other words we can
say that the concept of going concern assumes that a business firm would continue
to carry out its operations indefinitely, i.e. for a fairly long period of time and would
not be liquidated in the foreseeable future.
Cost Concept
According to this concept all fixed assets are recorded in the books at cost i.e. the
price paid to acquire them. Any subsequent increase or decrease in their value will
not be shown in the records except the depreciation of these assets. The concept of
cost is historical in nature as it is something, which has been paid on the date of
acquisition and does not change year after year.
However, an important limitation of the historical cost basis is that it does not show
the true worth of the business and may lead to hidden profits. During the period of
rising prices, the market value or the cost at (which the assets can be replaced are
higher than the value at which these are shown in the book of accounts) leading to
hidden profits.
Money Measurement Concept

According to this concept only those transactions are recorded in the books of
accounts which can be expressed in monetary terms. The non-financial or non-
monetary transactions do not find any place in the accounting records. Money is the
common denominator to denote the value of the various assets of diverse nature to
give a meaningful total of these assets. All such transactions or happenings which
cannot 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.
Matching Concept
The process of ascertaining the amount of profit earned or the loss incurred during a
particular period involves deduction of related expenses from the revenue earned
during that period. The matching concept emphasises exactly on this aspect. It
states 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 revenues must belong to the same accounting period.
The matching concept, thus, implies that all revenues earned during an accounting
year, whether received during that year, or not and all costs incurred, whether paid
during the year, or not should be taken into account while ascertaining profit or loss
for that year.
Revenue Recognition Concept

According to this concept income is treated as being earned on the date on which it
is realized i.e. the date on which goods or services are transferred to the customers.
Since this exchange of goods or services may be for cash or on credit, it is not
important whether cash has actually been received or not. The concept of revenue
recognition requires that the revenue for a business transaction should be included
in the accounting records only when it is realised. Thus, credit sales are treated as
revenue on the day sales are made and not when money is received from the buyer.
Full Disclosure
This concept implies that financial statements should disclose all material information
which is required by the proprietor and other users to assess the final accounts of
the business unit. The principle of full disclosure 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.
This is to enable the users to make correct assessment about the profitability and
financial soundness of the enterprise and help them to take informed decisions.
Materiality
This principle emphasizes that only those transactions should be recorded which are
material or relevant for the determination of income from the business. All immaterial
facts should be ignored. So, item having an insignificant effect or being irrelevant to
user need not be disclosed separately, these may be merged with other item. Efforts
should not be wasted in recording and presenting facts, which are immaterial in the
determination of income. For example, stock of erasers, pencils, scales, etc. are not
to be shown as separate assets, however they should be recorded under one head
as an amount of stationery.
Consistency
This principle requires that accounting practices, methods and techniques used by a
business unit should be consistent. A business unit can adopt any accounting
practice, but once a particular practice is chosen, it must be used for a number or
years. Consistency eliminates personal bias and helps in achieving results that are
comparable.
Conservatism or Prudence
This principle is nothing but a formal expression of the maxim “Anticipate no profits
and provide for all possible losses.” In other words, it considers all possible losses
but ignores all possible profits. The concept of conservatism (also called ‘prudence’)
provides guidance for recording transactions in the book of accounts and is based on
the policy of playing safe. The concept of conservatism requires that profits should
not to be recorded until realised but all losses, even those which may have a remote
possibility, are to be provided for in the books of account.

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Grade 11 Accountancy

Dual Aspect Concept

Accounting Period Concept

Going Concern Concept

Money Measurement Concept

Revenue Recognition Concept

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