Accounting principles are the rules and guidelines that companies must follow when reporting financial data.
Some of the major accounting principles followed in India are -
1. Business Entity- A business is considered a
separate entity from the owner(s) and should be
2.Going Concern-It assumes that an entity will continue to operate indefinitely.
3.Monetary Unit-The business financial transactions recorded and reported should be in monetary unit, such as US Dollar, Canadian Dollar, Euro, etc.
4.Historical Cost-All business resources acquired should be valued and recorded based on the actual cash equivalent or original cost of acquisition, not the prevailing market value or future value. Exception to the rule is when the business is in the process of closure and liquidation.
5.Matching-This principle requires that revenue recorded, in a given accounting period, should have an equivalent expense recorded, in order to show the true profit of the business.
6.Accounting Period-This principle entails a business to complete the whole accounting process over a specific operating time period.
Accounting period may be monthly, quarterly or annually. For annual accounting period, it may follow a Calendar or Fiscal Year.
7.Conservatism-This principle states that given two options in the amount of business transactions, the amount recorded should be the lower rather than the higher value.
8.Consistency-This principle ensures similar and consistent accounting procedures is used by the business, year after year, unless change is necessary.
9.Materiality-Business transactions that will affect the decision of a user are considered important or material, thus, must be reported properly. This principle states that errors or mistakes in accounting procedures, that which involves immaterial or small amount, may not need attention or correction.
10.Objectivity-This principle states that the recorded amount should have some form of impartial supporting evidence or documentation. It also states that recording should be performed with independence, that’s free from bias and prejudice.
11.Accrual-This principle requires that revenue should be recorded in the period it is earned, regardless of the time the cash is received. The same is true for expense. Expense should be recognized and recorded at the time it is incurred, regardless of the time that cash is paid. This is to show the true picture of the business financial performance.