Principles of Accounting and Accounting Assumptions

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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.PostulatesMean 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.DoctrinesMean 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.AxiomDenotes a
statement of truth which cannot be questioned by anyone.StandardsRefer 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.Accounting AssumptionsThe International Accounting Standards
Committee (lASC) as well as the Institute of Chartered Accountants of
India (ICAI) treat (vide IAS-I & AS-I) the following as the
fundamental accounting assumptions:(1) Going concernIn the ordinary
course, accounting assumes that the business will continue to exist and
carry on its operations for an indefinite period in the future. The
entity is assumed to remain in operation sufficiently long to carry out
its objects and plans. The values attached to the assets will be on the
basis of its current worth. The assumption is that the fixed assets are
not intended for re-sale. Therefore, it may be contended that a balance
sheet which is prepared on the basis of record of facts on historical
costs cannot show the true or real worth of the concern at a particular
date. The underlying principle there is that the earning power and not
the cost is the basis for valuing a continuing business. The business is
to continue indefinitely and the financial and accounting policies are
followed to maintain the continuity of the business unit.(2)
ConsistencyThere should be uniformity in accounting processes and
policies from one period to another. Material changes, if any, should be
disclosed even though there is improvement in technique. A change of
method from one period to another will affect the result of the trading
materially. Only when the accounting procedures are adhered to
consistently from year to year the results disclosed in the financial
statements will be uniform and comparable.(3) AccrualAccounting attempts
to recognize non-cash events and circumstances as they occur. Accrual is
concerned with expected future cash receipts and payments: it is the
accounting process of recognizing assets, liabilities or income for
amounts expected to be received or paid in future. Common examples of
accruals include purchases and sales of goods or services on credit,
interest, rent (not yet paid), wages and salaries, taxes. Thus, we make
record of all expenses and incomes relating to the accounting period
whether actual cash has been disbursed or received or not. If a
fundamental accounting assumption (i.e. Going concern, consistency and
accrual) is not followed (in the preparation of financial statements) the
fact should be disclosed. [AS-I para 27].

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