In the modem globe no organization can afford to stay secretive for the reason that several parties such as creditors, staff, taxation authorities, investors, public and government and so forth., are interested to know about the affairs of the organization. Affairs of the organization can be studied primarily by consulting final accounts and the balance sheet of the distinct organization. Final accounts and the balance sheet are finish items of book-maintaining. Due to the fact of the value of these statements it became needed for the accountants to create some principles, ideas and conventions which may possibly be regarded as fundamentals of accounting. Such fundamentals obtaining wide acceptance give reliability and creditability to the economic statements ready by the accountants. The have to have for 'generally accepted accounting principles' arises for two motives: 1st, to be logical and constant in recording the transactions and second, to conform to, the established practices and procedures.
There is no agreement amongst the accountants as regards the standard ideas of accounting. There is no uniformity in usually accepted accounting principles (GAPP). The terms-axioms, assumptions, conventions, ideas, generalizations, techniques, guidelines, doctrines, methods, postulates, requirements and canons are employed freely and inconsistently in the exact same sense.
“A common law or rule, adopted or professed as a guide to action, a settled ground or basis of conduct or practice.” This definition provided by dictionaries comes nearest to describing what most accountants imply by the word 'Principle'. Care must be taken to make it clear that as applied to accounting practice, the globe principle, does not connote a rule for which there can be no deviation. An accounting principle is not a principle in the sense that it admits of no conflict with other principles.
Imply to assume with out proof, to take for granted or good consent, a position assumed as self- evident. Postulates are assumptions but they are not arbitrary deliberate assumptions but usually recognized assumptions which reflect the judgment of 'facts' or trend or events, assumptions which have been borne out in previous by details supposed by legal institutions producing them enforceable to some extent.
Imply principles of belief: what the scriptures teach on any topic. It refer to an established principle propagated by a teacher which is followed in strict faith. But in accounting practice, no such doctrine have to have be adhered to but the word denotes the common principles or policies to be followed.
Denotes a statement of truth which can't be questioned by any one.
Refer to the basis anticipated in accounting practice, beneath unique situations. In Indian context, the Institute of Chartered Accountants of India (ICAI) constituted an Accounting Requirements Board on 21st April, 1977. The principal function of ASB is to formulate accounting requirements taking into consideration the applicable laws, customs, usages and organization atmosphere.
The International Accounting Requirements Committee (lASC) as effectively as the Institute of Chartered Accountants of India (ICAI) treat (vide IAS-I & AS-I) the following as the basic accounting assumptions:
(1) Going concern
In the ordinary course, accounting assumes that the organization will continue to exist and carry on its operations for an indefinite period in the future. The entity is assumed to stay in operation sufficiently extended to carry out its objects and plans. The values attached to the assets will be on the basis of its existing worth. The assumption is that the fixed assets are not intended for re-sale. For that reason, it may possibly be contended that a balance sheet which is ready on the basis of record of details on historical charges can't show the correct or actual worth of the concern at a distinct date. The underlying principle there is that the earning energy and not the expense is the basis for valuing a continuing organization. The organization is to continue indefinitely and the economic and accounting policies are followed to preserve the continuity of the organization unit.
There must be uniformity in accounting processes and policies from one particular period to yet another. Material adjustments, if any, must be disclosed even even though there is improvement in strategy. A alter of strategy from one particular period to yet another will have an effect on the outcome of the trading materially. Only when the accounting procedures are adhered to regularly from year to year the benefits disclosed in the economic statements will be uniform and comparable.
Accounting attempts to recognize non-money events and situations as they take place. Accrual is concerned with anticipated future money receipts and payments: it is the accounting approach of recognizing assets, liabilities or earnings for amounts anticipated to be received or paid in future. Popular examples of accruals consist of purchases and sales of goods or solutions on credit, interest, rent (not however paid), wages and salaries, taxes. As a result, we make record of all expenditures and incomes relating to the accounting period whether or not actual money has been disbursed or received or not. If a basic accounting assumption (i.e. Going concern, consistency and accrual) is not followed (in the preparation of economic statements) the reality must be disclosed. [AS-I para 27].