Accounting Principles and concepts are some of the most important areas from where UPSC generally 1-2 questions in the EPFO examinations. Once you have a firm grip on these accounting principles definitions, you can mark correct answer in the exam and hence increase the chances of your selection.
Money measurement principle
- According to this principle, only those transactions or events are accounted that can be measured or expressed in terms of money.
- Goodwill, tension, or other qualitative instruments are not accounted while writing transactions due to this concept.
Business entity concept
- According to this concept, business and business owner are two separate entities as far as their financial transactions are concerned.
- So, legally, a business can exist independently of its owner and the firm can sue or can be sued in its own name.
- According to this principle, all the transactions are recorded on the assumption that the business will remain in operation for a long time and will carry all its responsibilities as per the pre-decided plan.
- This principle allows the distinction between current transactions and non-current transactions.
- This principle sets the rules for accounting the fixed assets.
- It states that all the fixed assets are accounted at the original price (the price paid to procure it).
- This price is then decreased every year owing to the usage, wear and tear, accidents, passage of time, which is often referred as depreciation.
- According to this principle, every transaction has a dual or two-fold effect and should therefore be recorded at two places.
- It is for this purpose we acknowledge that for every debit, corresponding credit should be made.
- It forms the foundation on which the accounting system is carried out.
Accounting year concept
- It implies that each firm should choose a specific time period to complete the accounting cycle and financial reporting.
- So, fundamentally, this principle talks about the periodicity of accounting.
- It states 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.
- It, thus, gives a true picture of profit earned during the accounting period.
Revenue Recognition (Realization) concept
- According to this principle, the revenue for a business transaction should be included in the accounting records only when it is realised, and not when the payment is received.
- So, it can be inferred that anything paid or received is not considered as profit until the goods or services have been delivered to the purchaser.
- It prescribes that accounting policies and practices that are followed by enterprise should be uniform and consistent over the period of time.
- It is useful in drawing conclusions regarding the working of an enterprise as it allows comparisons over a period of time.
Full disclosure Concept
- It requires that all material and relevant facts concerning financial performance of an enterprise must be fully and completely disclosed in the financial statements.
- It enables the users to make correct assessment about the profitability and financial soundness of the enterprise and help them to take informed decisions about the future of the enterprise.
Conservatism (Prudence) Concept
- It requires that profits should not to be recorded until realised but all losses, even those which may have a remote possibility, should be provided for in the books of account.
- It is based on the policy of playing safe as a conscious approach is adopted in ascertaining income so that profits of the enterprise are not overstated.
- It states that accounting should focus on material facts and efforts should not be wasted in recording and presenting facts, which are immaterial in the determination of income.
- The materiality of a fact depends on its nature and the amount involved. For example, for a business having a turnover of Rs. 200 crores, a transaction of Rs. 20 is immaterial and hence should not be recorded.