Introduction
The word ‘Principle’ has been differently viewed by different users. The American Institute of Certified Public Accountants (AICPA) has viewed the word ‘principle’ as a general law or rule adopted or professed as a guide to action; a settled ground or basis of the conduct of practice. Accounting principles refer, to certain rules, procedures, and conventions that all present a consensus view by those indulging in good accounting practices and procedures. To be more reliable, accounting statements are prepared in conformity with these principles. The accounting principle is considered to be relevant and useful to the extent that it increases the utility of the records to its users. Though accounting principles are denoted by various terms such as concepts. conventions, doctrines, assumptions, axioms, postulates, etc it can be classified into three groups, viz, fundamental accounting assumptions, accounting concepts, and accounting conventions.
GAAP: Assumptions, Concepts and Conventions
General Accepted Accounting Principles (GAAP)
According to The American Institute of Certified Public Accountants (AICPA) ‘accounting principles may be defined as those rules of action or conduct which are derived from the experience, prudence, practice, customs and statements of professional bodies and regulations of government bodies and when they prove useful, they become accepted principles of accounting.
Features of Accounting Principles
The accounting principles have been developed over a long period of time on the basis of past experience, customs statements of individuals, professional bodies like ICAI, ICSI, AICPA, IASC, etc.
These principles are not static in nature and are bound to change from time to time due to changes in the business environment.
The salient features of accounting are:
(i) Not static They are classified into categories. General principles and modifying principles. Such modifying principles change with the passage of time due to changes in the environment.
(ii) Man-made They are man-made which have been prepared on the basis of their experiences in day-to-day business life. These principles are not as exact as the principles of natural science.
(iii) Generally accepted They are the theory base of accounting. They act as guides in the accounting profession and are accepted worldwide.
Classification of Accounting Principles
Fundamental Accounting Assumptions
It is something that is accepted as true without proof. Certain assumptions which are presumed to have been followed in preparing the annual accounts are known as fundamental accounting assumptions.
The entities which do not follow any of the fundamental accounting assumptions are required to disclose which of these assumptions have not been followed and reasons for not following them.
Accounting Standard 1 issued by ICAI states that the following have been accepted as fundamental accounting assumptions:
(i) Going concern assumption This concept assumes that a business firm would continue to carry out its operations indefinitely for a very long period of time and there is no intention to close the business or scale down its operations significantly.
(ii) Consistency This assumption states that the accounting practices once selected and adopted, should be applied consistently year after year. This will help in better understanding of inter firm and intra firm comparison of financial statements.
(iii) Accrual According to this assumption, revenue is recognized when the goods are sold or services are rendered whether cash has been realized in the same accounting year or not.
Similarly, expenses are recognized as expenses in the same accounting year in which revenue relating to it, is recognized whether cash has been paid or not.
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