Accounting Principles and Accounting Equation:
Definition and Explanation:
Accounting is the language of
business. Affairs of a business unit are made understood to others as well
as to those who own or manage it through accounting information which has to
be suitably recorded, classified, summarized and presented.
In order to make
this language to convey the same meaning to all people, it is necessary that
it should be based on certain uniform scientifically laid down standards.
These standards are termed as accounting principles.
Accounting principles may be defined as those rules of action or conduct
which are adopted by the accountants universally while recording accounting
transactions. In the absence of common principles there will be a chaotic
situation and every accountant will have his own principles. Not only the
utility of accounts will be less but these will not be comparable even in
the same business. Therefore, it become essential that common principles
should be followed for measuring business revenues and expenses.
Essential Features of Accounting Principles:
Accounting principles are
accepted if they satisfy the following norms:
A principle will be relevant
only if it satisfies the needs of those who use it. The accounting
principles should be able to provide useful information to its users
otherwise it will not serve the purpose.
A principle will be said to be
objective if it is based on facts and figures. There should not be a scope
for personal bias. If the principle can be influenced by the personal bias
of users, it will not be objective and its usefulness will be limited.
The accounting principle
should be practicable. The principles should be easy to use otherwise their
utility will be limited.
Classification of Accounting principles:
Accounting principles can be
classified into two kinds:
The term concepts includes those basic assumptions or conditions upon which
accounting is based.
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The term "conventions" includes those customs or traditions which guide
the accountants while preparing the accounting statements.
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Dual aspect may be stated as
"for every debit, there is a credit." Every transaction should have twofold
effect to the extent of the same amount. This concept has resulted in
accounting equation which states that at any point of time the assets of
any entity must be equal (in monetary terms) to the total of equities.
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