Accounting Principles| Generally Accepted Accounting Principles GAAP.

Accounting Principles| Generally Accepted Accounting Principles GAAP| Assumptions and Concepts of Accounting.

Meaning of Accounting Principles.

Principles of accounting are those rules on the basis of which accountant prepares financial statements and accounts. Accounting Principles are those guidelines, through which accounting is made more practical and effective. It is necessary to follow principles of accounting for proper accounting and general acceptability of accounts throughout the world. 

In brief, "Accounting principles are guidelines for preparing financial statements and maintaining accounts to bring uniformity in the preparation and presentation of financial statements."

Classification of Accounting Principles

Accounting Principles can be classified into following three parts -

(1) Basic Assumptions or concepts of Accounting.

(2) Basic Principles of Accounting

(3) Modifying Principles of Accounting

In this blog we will discuss only Basic assumptions of Accounting and next two in next one.

Basic assumptions of Accounting.

Basic assumptions of accounting are the foundation on which the strong building of Accounting stands. These are those basic assumptions which are accepted and applied at the time of preparing financial statements.

The following four are considered as main assumptions -

(1) Assumption of Accounting Entity.

(2) Assumption of Monetary Measurement.

(3) Assumption of Going Concern.

(4) Assumption of Accounting Period.

1. Assumption of Accounting Entity- According to this assumption business is treated as separate from its owners. Transactions of the business with the owner are treated in the same manner as with the outsiders. Money invested by the owner is treated as liability and the amount withdrawn from the business is recorded in a separately opened drawings account. Separate business entity concept is applicable to all types of organisations whether sole proprietorship, partnership or company organisation.

2. Assumption of Money Measurement- According to this concept only those events or business transactions are recorded in account books which can be exactly measured in money. These events or transactions are expressed in different countries in their respective currencies, in India it is in terms of rupees. The transactions which are not of monetary nature have no place in account books.

3. Assumption of Going Concern- According to this assumption it is assumed that business will continue in future for indefinite period of time and will not be closed. As a result of this concept, accountants value the goods and assets not at the market price but at the cost price. In the same way depreciation on the assets is not calculated at its market price but on its cost price over the estimated useful life. Adjustments regarding outstanding expenses, prepaid expenses, accrued incomes and unearned incomes etc. are also made when the final account are prepared at the end of the year. Because accountant believe that business will continue in future also therefore these adjustments will be adjusted in future.

4. Assumption of Accounting Period- According to this assumption, final accounts should be prepared annually for a regularly running business. If period concept is not kept in mind then the profit or loss cannot be known properly. For business of short period, business period itself is treated as the accounting period.

Generally, accounting period is of one year. But this period depends upon the nature and object of a particular business. On the basis of accounting period concept, comparison of progress and financial position of the business with that of another period becomes possible. Various plans can be made for progress of business on the basis of annual comparison of cost of business, efficiency of business, profit of business.