Top 5 Accounting Concepts - Short Notes

Full Disclosure Principle: According to this principle, apart from legal requirements all significant and material information relating to the Economic affairs of the entity should be completely disclosed in its financial statements and accompanying notes to accounts. 

The financial statements should act as means of conveying and not concealing the information. Disclosure of information will result in better understanding and the parties may be able to take sound decisions on the basis of the information provided e.g., footnotes such as: 

1. Contingent liabilities in respect to a claim of very big amount    against the business are pending in a Court of Law. 

2. Change in the method of providing depreciation. 

3. Market value of investment.

 Materiality Principle: 

Disclosure of all material facts is compulsory but it does not imply that even those figures which are irrelevant are to be included in financial statements According to this principle, only those items or information should be disclosed that have material effect and relevant to the users. So, items having an insignificant efect or being irrelevant to user need not be disclosed separately, these may be merged with other items.

If the knowledge of any information may affect the user's decision, it is termed as material information.

It should be noted that an item material for one enterprise mav not be material for another enterprise, e.g., an item of expense RS. 50,000 is immaterial for an enterprise having turnover of Rs 100 crore.

Prudence principle: According to this principle, profit in anticipation should not be recorded but loss in anticipation should immediately be recorded. The objective of this principle is not lo overstate the profit of the enterprise in any case. When different equally acceptable alternative methods are available the method which having least favourable immediate effect on profit should be adopted, e.g

1. Valuation of stock at cost or realizable values, whichev is lower.

2. Provision for doubtful debts and provision for discount on debtors is made

Cost Principle: According to this principle, an asset is recorded in the books of accounts at its original cost comprising cost of acquisition and all expenditure incurred for making the assets ready to use. This cost becomes the basis of all subsequent accounting transactions for the asset, since the acquisition cost relates to the past, it is referred to as historical cost. Example: machinery purchased for Rs. 1,50,000 in cash and Rs. 20,000 was spent on Installation of machine then Rs. 1,70,000 be recorded as cost of machine in the books and depreciation will be charged on this cost. If market value of machine due to inflation has gone upto Rs. 2,00,000 then the increased value will not be recorded. This cost is systematically reduced from year after year by charging depreciation and the assets are shown in the balance sheet at book value (cost-depreciation).

Matching principle: According to this principle, all expenses incurred by any enterprise during an accounting period are matched with the revenue recognized during the same period.

The matching principle facilitates to ascertain the amount of profit or loss incurred in a particular period by deducting the related expenses from the revenue recognized during that period.

The following treatment of expenses and revenue are done due to matching principle:

1) Ascertainment of prepaid expenses.

2) Ascertainment of income received in advance.

3) Accounting of closing stock.