ACCOUNTING RULES
Chapter 10
INTRODUCTION
Accounting rules need to be applied in order for the preparers and users of
accounting information to understand the information.
Accounting rules also help in comparing the accounting information provided by
different businesses.
ACCOUNTING PRINCIPLES
Accounting principles are also referred as concepts. A concept is a rule which sets
down how the financial activities of a business are recorded.
There are 10 Accounting principles that need to be applied by accountants while
preparing the financial statements.
1. BUSINESS ENTITY
The business entity principle means that the business is treated as being completely
separate from the owner of the business.
The personal assets and spending of the owner do not appear in the accounting
records of the business.
If there is a transaction concerning both the business and its owner, then it is recorded
in the accounting records of the business.
2. CONSISTENCY
The consistency principle means that accounting methods must be used consistently
from one accounting period to another.
The method that has the most realistic outcome should be selected and applied
consistently by the business.
If consistency principle is not applied, a comparison of the financial results cannot be
made effectively.
3. DUALITY
This principle means that every transaction is recorded twice – once on the debit side
and once on the credit side.
Also known as the dual aspect priniciple.
4. GOING CONCERN
This principle means that the accounting records are maintained on the basis that the
business will continue to operate for an indefinite period of time.
The principle means that there is no intention to close down the business or reduce the
size of the business by any significant amount.
5. HISTORIC COST
The historic cost principle requires that all assets and expenses are initially recorded
in the ledger accounts at the actual cost.
For example: A computer equipment purchased for $5,000 would be recorded at the
same amount in the financial statements and depreciation on the non-current asset
would be accounted for separately.