Principles of Accounting and Accounting Assumptions

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 enthusiastic 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 slay products of book-keeping. Because of the importance of these statements it became principal for the accountants to do 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 approved 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 common accounting principles (GAPP) . The terms-axioms, assumptions, conventions, concepts, generalizations, methods, rules, doctrines, techniques, postulates, standards and canons are passe 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 create it definite 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 pick without proof, to remove for granted or obvious consent, a plot assumed as self- evident. Postulates are assumptions but they are not arbitrary deliberate assumptions but generally recognized assumptions which deem the judgment of 'facts' or trend or events, assumptions which have been borne out in past by facts supposed by fair institutions making them enforceable to some extent.



Doctrines



Mean principles of belief: what the scriptures squawk 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.



Accounting Assumptions



The 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 concern



In 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 novel 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 relate of facts on historical costs cannot exhibit the just or right worth of the inconvenience 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 enjoy the continuity of the business unit.



(2) Consistency



There 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 way 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) Accrual



Accounting attempts to observe 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. approved examples of accruals include purchases and sales of goods or services on credit, interest, rent (not yet paid), wages and salaries, taxes. Thus, we produce represent of all expenses and incomes relating to the accounting period whether valid cash has been disbursed or received or not. If a fundamental accounting assumption (i.e. Going exertion, consistency and accrual) is not followed (in the preparation of financial statements) the fact should be disclosed. [AS-I para 27].