Accounting Principles, Concepts & Conventions

Introduction

Accounting Principles, Accounting Concepts and Accounting Conventions form the foundation of the entire accounting system. They provide a uniform structure, ensure consistency, enhance comparability and bring reliability to financial statements. Without these guiding rules, financial information would become misleading, inconsistent and unacceptable for users like investors, creditors, government authorities and management.

Accounting Principles

Accounting principles are the fundamental guidelines or theoretical bases that govern accounting practices. They ensure that all accountants follow a uniform, systematic and scientific method while preparing accounts. These principles are generally accepted (GAAP) and recognised worldwide.

Important Accounting Principles

• 1. Principle of Dual Aspect: States that every transaction has two effects — debit and credit. It forms the base of the double-entry system.
• 2. Principle of Conservatism (Prudence): "Anticipate no profit but provide for all possible losses." Accounts should never overstate assets or income.
• 3. Principle of Consistency: Once an accounting method is adopted, it must be continued year after year for comparison and reliability.
• 4. Principle of Materiality: Only material items (those affecting decisions) should be recorded separately; immaterial items may be clubbed.
• 5. Principle of Full Disclosure: All important and relevant information must be disclosed in the financial statements.
• 6. Principle of Objectivity: Accounting information should be supported by verifiable evidence such as invoices, bills, vouchers.
• 7. Principle of Matching: Expenses must be matched with the revenues of the same period to ascertain true profit.
• 8. Principle of Cost: Assets are recorded at their purchase price, not market value.

Accounting Concepts

Accounting concepts are the basic assumptions on which the entire accounting system is based. They provide logical reasoning and explain "why" a particular item is recorded in a specific way. They ensure uniform interpretation of accounting information.

Major Accounting Concepts

• 1. Business Entity Concept: Business is separate from its owner; personal and business transactions must not be mixed.
• 2. Money Measurement Concept: Only transactions measurable in monetary terms are recorded.
• 3. Going Concern Concept: Assumes business will continue indefinitely; therefore, assets are recorded at cost, not liquidation value.
• 4. Accounting Period Concept: The life of business is divided into equal periods for reporting, usually one year.
• 5. Accrual Concept: Revenue and expenses are recorded when they are earned/incurred, not when cash is received or paid.
• 6. Realisation Concept: Revenue is recognised only when a transaction is substantially complete.
• 7. Dual Aspect Concept: Every transaction affects two accounts; basis of double-entry system.

Accounting Conventions

Accounting conventions are practical guidelines based on long-standing customs. They are not strictly enforced like principles but are followed to maintain uniformity and fairness in reporting. They arise from accounting practices and general acceptance.

Important Accounting Conventions

• 1. Convention of Consistency: Same methods must be used every year for comparison.
• 2. Convention of Disclosure: All relevant information must be disclosed honestly in financial statements.
• 3. Convention of Conservatism: Caution must be exercised; provide for future losses, avoid unrealised profits.
• 4. Convention of Materiality: Only important items should be recorded separately; immaterial items may be grouped.

Difference Between Concepts and Conventions

Conclusion

Accounting principles, concepts and conventions act as the backbone of financial accounting. They ensure that financial statements are prepared on a uniform, reliable and comparable basis. Together, they make accounting a scientific, systematic and credible discipline that supports decision-making and legal compliance.