Basic Accounting Principles and Guidelines

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Introduction:

Every company must follow some rules and guidelines to prepare the financial statement which is pre-defined by the country’s law is called accounting principles of accounting. Preparation of financial statement without adopting these pre-defined principles of accounting would be irrelevant, unacceptable by law and unreliable.

1. Going concern:

Going concern means an entity will operate for an indefinitely long period in future. General purpose financial statements are prepared to assume that the company can and will continue its business for at least one year more.

2. Accrual principle:

Accrual concept means recording the business transaction when they actually occur. Expenses recorded in books when they are incurred not when they are paid. Incomes recorded when they are earned not when they are received.

3. Entity:

Entity concept means we have to treat the business as a separate entity from its owner. It means that accounting records are maintained for the business not the owner of the business. That’s why amount invested by the owner into the business is treated as a capital of the business and amount withdrawal treated as drawing.

 4. Cost principle:

Cost principle means we have to record assets at the purchase price or expenses incurred on its acquisition and installation, not on the market value of the assets at the time of purchase or acquisition.

5. Money Measurement:

Money measurement means that we have to record only that transaction which can be measured in money Because money is the excellent indicator of the value.

6. Accounting period:

Accounting period means that the life of an entity broken into time period says one year to report profit/loss for the entity. The time period may vary but usually a 12 month period.

7. Full disclosure principle:

Full disclosure means that we have to disclose all material information about all business transactions done within the financial year in the financial statements either on the face of the financial statements or in the notes to the financial statements.

8. Matching Principle: 

Matching is one of the pervasive principles of accounting. It is a technique which implies that expenses of the particular period of time are matched with the revenue of the same period.

9. Consistency Concept:

Consistency means that we have to use the same accounting methods and techniques in future once already applied in previous years.

10. Reliability principle:

Reliability means the information provided in financial statements are should be accurate, true and fair.

11. Understandability Concept:

Understandability means the information provided in financial statements are should be well presented and easily understandable to each party.

12. Comparability Principle:

Accounting information is comparable when accounting standards and policies are applied consistently from one period to another and from one region to another. The characteristic of comparability of financial statements is important because it allows us to compare a set of financial statements with those of prior periods and those of other companies

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