Principles of Accounting
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In the modem world no business can
afford to remain secretive because various parties such as creditors, employees,
taxation authorities, investors, public and government etc., are interested to
know about the affairs of the business. Affairs of the business can be studied
mainly by consulting final accounts and the balance sheet of the particular
business. Final accounts and the balance sheet are end products of book-keeping.
Because of the importance of these statements it became necessary for the
accountants to develop some principles, concepts and conventions which may be
regarded as fundamentals of accounting. Such fundamentals having wide acceptance
give reliability and creditability to the financial statements prepared by the
accountants. The need for 'generally accepted accounting principles' arises for
two reasons: First, to be logical and consistent in recording the transactions
and second, to conform to, the established practices and
procedures.
There is no agreement among the
accountants as regards the basic concepts of accounting. There is no uniformity
in generally accepted accounting principles (GAPP). The terms-axioms,
assumptions, conventions, concepts, generalizations, methods, rules, doctrines,
techniques, postulates, standards and canons are used freely and inconsistently
in the same sense.
Principles
"A general law or rule, adopted or
professed as a guide to action, a settled ground or basis of conduct or
practice." This definition given by dictionaries comes nearest to describing
what most accountants mean by the word 'Principle'. Care should be taken to make
it clear that as applied to accounting practice, the world principle, does not
connote a rule for which there can be no deviation. An accounting principle is
not a principle in the sense that it admits of no conflict with other
principles.
Postulates
Mean to assume without proof, to
take for granted or positive consent, a position assumed as self- evident.
Postulates are assumptions but they are not arbitrary deliberate
assumptions but generally recognized assumptions which reflect the judgment
of 'facts' or trend or events, assumptions which have been borne out in past by
facts supposed by legal institutions making them enforceable to some extent.
Doctrines
Mean principles of belief: what the
scriptures teach on any subject. It refer to an established principle propagated
by a teacher which is followed in strict faith. But in accounting practice, no
such doctrine need be adhered to but the word denotes the general principles or
policies to be followed.
Axiom
Denotes a statement of truth which
cannot be questioned by anyone.
Standards
Refer to the basis expected in
accounting practice, under different circumstances. In Indian context, the
Institute of Chartered Accountants of India (ICAI) constituted an Accounting
Standards Board on 21st April, 1977. The main function of ASB is to formulate
accounting standards taking into consideration the applicable laws, customs,
usages and business environment.
Assumptions
Certain fundamental accounting
assumptions underlie the preparation and presentation of financial statements.
There are namely, (a) Going concern, (b) Consistency and (c) Accrual. They are
usually not specifically stated because their acceptance and use are
assumed.
Conventions
The term convention means
"established usage'. Conventions are based on practicability and usage. For
example, the relationship of 12 units forming a dozen is a
convention.
Concept
Denotes logical consideration and a
notion which is generally and widely accepted. The term is not used in the sense
of a set of hard and fast rules but rather of rules of general application which
provide guide in selection of accounting methods appropriate in particular
circumstances.
