Basics of Accounting Principles and Conventions :-
Accounting principles and conventions serve as the foundation for accounting practices and ensure that financial information is recorded, presented, and interpreted consistently. They provide a framework for accountants and organizations to prepare financial statements and make informed financial decisions. Here are some key accounting principles and conventions:
Accounitng Principles
Going Concern Principle:
This principle assumes that a business will continue to operate indefinitely unless there is evidence to the contrary. It allows assets to be recorded at their historical cost rather than their liquidation value.
Accrual Principle:
Under this principle, transactions are recorded when they occur, not necessarily when cash changes hands. This means recognizing revenues when they are earned and expenses when they are incurred, even if payment hasn’t been received or made yet.
Conservatism Principle (Prudence):
Accountants should exercise caution when making estimates and judgments, preferring methods that are more likely to understate rather than overstate assets and income.
Consistency Principle:
Once an accounting method or principle is chosen, it should be consistently applied from one period to the next. Changes in methods should be disclosed and explained in financial statements.
Materiality Principle:
Accountants should focus on recording and reporting items that are material or significant to users of financial statements. Immaterial items need not be recorded separately.
Matching Principle:
Expenses should be matched with revenues in the period in which they contribute to the generation of revenue. This is closely related to the accrual principle.
Full Disclosure Principle:
Financial statements should provide all necessary information to understand a company’s financial position, including notes and explanations that clarify the data presented.
Accounitng Conventions
Conservatism Convention:
This convention suggests that when there are multiple acceptable accounting methods, the one that results in lower profits and asset values should be chosen to be conservative.
Consistency Convention:
This convention advises maintaining consistent accounting practices over time, making it easier for users to compare financial statements from one period to another.
Materiality Convention:
Similar to the materiality principle, this convention suggests that immaterial items need not be treated with the same level of detail as material ones.
Disclosure Convention:
It emphasizes the importance of disclosing all relevant financial information, even if it doesn’t conform to specific accounting standards.
Cost Convention (Historical Cost Convention):
Under this convention, assets are recorded at their original cost rather than their current market value. This convention ensures objectivity and verifiability but may not reflect the current economic reality of assets.
Entity Convention:
This convention requires that the financial affairs of the business are kept separate from the personal affairs of the owner(s). It treats the business as a separate legal entity.
Money Measurement Convention:
Only transactions that can be measured in monetary terms are recorded in the accounting system. This convention limits the scope of what can be included in financial statements.