Accounting Rules and Principles
Notes
Accounting Rules and Principles
Accounting Principles are sometimes referred as concepts and conventions.
Concepts are rules set down how the financial activities are recorded.
Convention is acceptable method by which the rule is applied.
Accounting Principles
1.
Business entity principle(Accounting entity principle)
2.
Consistency principle
3.
Duality principle
4.
Going concern principle
5.
Historic cost principle
6.
Matching principle (Accrual principle)
7.
Materiality principle
8.
Money measurement principle
9.
Prudence principle
10.
Realisation Principle
Business entity principle
The business is treated as being completely separate from the owner(s) of the business.
Everything is recorded from the viewpoint of the business.
Eg- When the owner takes goods or cash from the business for personal use, it will be
recorded as drawing.
Consistency principle
Where a choice of method is available, the one with the most realistic outcome should be
selected and used consistently used from one accounting period to the next.
Eg -Depreciation method, Depreciation Rate
Duality principle
Every transaction has two aspects - a giving and a receiving.
Eg- double entry system
Going concern principle
The business will continue to operate for an indefinite period of time and there is no intention
to close down or significantly reduce the size of the business.
Eg – Non- current assets are valued at their book value.
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Accounting Rules and Principles
Notes
Historic cost principle
This principle requires that all assets and expenses are initially recorded in the ledger
accounts at their actual cost.
Matching principle (Accrual principle)
The revenue of the accounting period is matched against the costs of the same period.
Eg- Figures in income statement must relate to the period covered by that statement.
Materiality principle
This principle applies to item of low value item (item which are not material) which are not
worth recording as separate items.eg paper clip, pocket calculator, watch
They are treated as general expenses and charged to income statement.
Money measurement principle
Only information which can be express (measure) in terms of money can be recorded in the
accounting records.
Eg- Moral of workers and effectiveness of good manager are not included in the accounting
records.
Prudence principle
Accountant should ensure that profits and assets are not overstated, and that liabilities and
losses are not understated.
Realisation Principle
Revenue is only regarded as being earned when the legal title to goods or services passes
from the seller to the buyer.
Eg- Goods sold on credit recorded as sales although the customer does not paid
immediately.
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Accounting Rules and Principles
Notes
Inventory
International accounting standards require that inventories be valued at the lower of cost and
net realizable value(NRV).
Net realisable value- The estimated receipt/selling price from the sales of the inventory less
any costs of completing the goods or costs of selling the goods.
NRV= expected selling price- additional costs
Additional costs = eg new labels, delivery charges, selling expense
Inventory and Accounting Concept
Historic cost
All assets and expenses are recorded in the ledger accounts at their actual cost at the time
of purchase, not at market value. The cost of the inventory is a known fact and can be
verified.
Consistency
Once a method has been selected , the method must be used consistently from one
accounting period to the next periods not to distort profits. So if inventory valuation method
has been chosen, eg FIFO or LIFO, this chosen method must be used consistently from one
period to the next.
Prudence
Accountant should ensure that profits and assets are not overstated, and that liabilities and
losses are not understated.
Inventory is valued at the lower of cost or net realisation value . This is an application of the
prudence concept.
Matching principle (Accrual principle)
The revenue of the accounting period is matched against the costs of the same period.
Cost of goods sold should be recorded in the period in which revenues are earned.
Realisation
Sales are recognised when the ownership of goods sold and legal liability to pay passes to
the customer
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Accounting Rules and Principles
Notes
Quality of information which should be considered when selecting accounting
policies.
Comparability
Financial statements are only useful if the
information they contain can be compared
with previous periods or other businesses.
Relevance
Financial information is relevant if it affects
the business decisions .
Understandability
A financial report must be capable of being
understood by the users of that report
Reliability
Information provided in financial statements
must be reliable.
It must be free from bias.
It must be free from significant errors.
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