1. Business Entity Principle
This principle assumes that, business and businessman are two separate entities.
All transactions are recorded from the point of view of business and not from the point of view of businessman.
Businessman is treated as creditor of business.
2. Money measurment Principle
Only those transactions are recorded in the books of accounts which can be measured in terms of Money.
Non – monetary transactions are not recorded in the books of accounts.
Strike, efficiency of management , quality of product, loyal employee., affects the business but cannot be measured in terms of money, that’s why they are not recorded in books of accounts.
3. Accounting Period Principle/Periodicity Principle
Life of business is indefinite, so Indefinite life is divided into periodic intervals, each intervals is known as accounting period(normally one year/12 months).
At the end of each accounting period an financial statements (P&L A/c and Balance sheet) are prepared to know the profitability and financial position of the business.
4. Cost concept or Historical cost concept
All business transaction are recorded at their cost price.
All business assets are recorded in books at cost i.e., the price paid to acquire it.
Any increase or decrease in the market price is not considered.
If nothing is paid to acquire an assets the same will not be recorded as an assets. For example : self generated goodwill, favourable location, managerial skills, moral of employee etc.
5. Matching principle
This concept is based on Accounting period concept.
In order to determined profit earned or loss suffered by a business duiring an accounting period, revenue of that period should be match with expenses incurred in that period.
Matching means association of Revenue with Related expenses.
Due to this concept adjustment should be made for like write off, outstanding expenses, prepaid expenses etc.
6. Dual Aspect Principle:
Every business transaction has double effect one is debited and other is credited.
If transaction is debited, the same should be credited with an equal amount.
Assets are always equal to liabilities.
Hence, Accounting Equation according to this principle is:
Assets = Capital + liabilities
7. Realisation principle or Revenue Recognition Principle
Revenue is considered as being earned on the date when goods are sold, wheather money is received or not. For example sales on approval not recorded as revenue until approved by customer.
Only those transactions should be recorded which are material or relevant for the determination of income of the business. All immaterial or unimportant items should not be recorded.
For example: purchase of stationary is recorded as an expense even if the stationary purchased is an assets.
Anticipate no profits but provide for all possible losses.
Be ready to protect the possible losses, but don’t predict the profits.
For example: provision for bad debts.
Provision for depreciation.
10. Going concern concept/continuity concept
Business will continue for a long time.
There is neither the intention nor the necessity to liquidate the business.
Business activities will continue and transactions will be recorded accordingly.
one policy is used year by year, do not change the policy.
If we change the policy, accounts will not clear the financial statements.
If some proved and better method of accounting is made available it can be adopted by business, but not again and again.
12. Full disclosure
all material information should be disclosed. It means nothing should be hidden.
The concept say, “all information of A/c should show to the public not hide anything.”
Provide all information to the mgmt. in time.
Record the information/transaction According to Date & time.
If information is not supplied in time it will obstruct the quick decision making.