Must Read Important Accounting Principles & concepts

1. Accounting Entity: An entity has a separate existence from its owner. According to this principle, business is trea entity, which is separate and distinct from its owner. Therefore transaction are recorded; analyzed and financial statements are prepared from the business point of view and not of the owner.

The owner is treated as a creditor (internal liability) for his investment in the business, as if the firm has borrowed from its owner instead of the outside parties. Interest on capital is treated as expense like any other business expense. His private expenses are treated as drawings leading to reduction in capital

2. Money Measurement Principle: According to this principle only those transactions that are measured in money or can be expressed in term of money are recorded in the books of accounts of the enterprise. Non-monetary events like death of any employee/manager, strikes, disputes etc., are not recorded at all, even though these also affect the business operations significantly.

Limitations:

1. It ignores qualitative aspect e.g., efficient human resources (assets), satisfied customers (assets) and dishonest employee (liabilities).

2. Value of money (currency) is not stable. To make accounting records simple, relevant, understandable and homogeneous, fact are expressed in a common unit of measurement-money, which is not stable.

3. Accounting Period Principle: According to this principle, the whole indefinite life of an enterprise is divided into parts , know as accounting period.

Accounting period is defined as interval of time, at the end of which the profit and loss account and balance sheet are prepared, so that the performance is measured at regular intervals and decision can be taken at the appropriate time Accounting period is usually a period of one year.

Relevance:

1. This assumption requires showing the allocation of expenses between capital and revenue.

2. Portion of capital expenditure that is consumed during the current year is charged to income statement and rest of the portion i.e., unconsumed portion is shown as an asset in the balance sheet.

3. As per income tax law, tax on income is calculated on annual basis from 1st April to 31st March (financial year).

4. Timely action for corrective measures can be taken by management.