Principal of accounting
Principles of Accounting
Complete and general acceptable list of accounting principle is not available. They are classified in the follow-
ing three categories:
(1) Balance Sheet Principles,
(ID) Income Statements Principles
(III) General Principles
1. Balance Sheet Principles
Balance Sheet reflects the true and fair picture of economic status of an organisation. The main principles re-
lating to it are as under:
1) Subject Matter Principles: Balance Sheet is divided into two parts as
(a) Liability side and
(b) Asset side.
These principles directs about various items to be shown in the balance sheet.
1. According to this principle, balance sheet
must be prepared on a particular date in a specified format and the following items are included in the subject matter Nature and amount of capital employed.
(ii) Nature and amount of reserve, surplus and profits.
(ili) Nature and amount of long-term and short-term liabilities.
(iv) Amount of outstanding, prepaid, accrued and unearned income.
(vi) Nature and amount of fixed assets.
5.Nature of investments, method of valuation and its amount.
(vii)Nature and amount of current assets.
(viii) Nature and amount of fictitious assets.
(2) Principles of Fixed Assets: The assets having long period in business are known as Fixed Assets.
They are of two types as
(a) Tangible fixed assets and
(b) Intangible Fixed Assets. Land, Building, Machinery, Equipment,Furniture and Fixtures etc. are tangible assets, while Good-will, Patents, Trademarks etc. are known as intangible assets.
The following points are considered regarding fixed assets:
(iv)Fixed assets are to be shown at cost price in first year and thereafter at depreciated value and the amount of any increment should be added, and amount of depreciation should be deducted.
(1) Fixed assets are not to be shown on present price or Market price Tangible and intangible fixed assets are to be shown separately.Intangible assets should be written off as early possible.
5) Principle of Investment: Money invested in the shares, debenture, bonds, govt securities or securities of other institutions are known as Investments. The following
points are considered while accounting of these investments:
(1) Investment in govt. securities, in company and other investments are to be shown separately.
2. Investment should be value keeping in view its cost and market price.
3.The method of valuation of each investment (Cost or Market price) should be shown clearly,
(4) Principles of Current Assets : Interest accrued on investments. stores, loose tools, trading stock, sundry debtors, bills receivables, work-in-progress, cash-at-bank
etc. are known as Current Assets. The following points are considered in regards to current assets:
-The valuation of current assets is done keeping in mind its cost price, market price and present price.
-The method of valuation of stock should be clear.
-Reserves, funds or provisions of current assets should be recorded along with the current assets.
-Specified current assets should be shown separately.
(5) Principles of Deferred Expenses: Huge revenue expenditure made with the hope earning of future profits is known as deferred expenses. The enterprise gets advantage
of it for many years to come such as heavy expenditure incurred on advertisement etc. This amount is calculated by dividing the amount by expected number of years and the
unabsorbed amount is shown on the asset side of the balance sheet
(6) Principle of Capital Balance: According to this principle, the amount of capital balance is not to be used as revenue. The following points are considered in this regards-
(1) The capital of the sole proprietor should be shown in the balance sheet after adding profit of the year and deducting loss and drawings (if any).
2.The capital of partners of a partnership firm should be shown separately in the balance sheet after making necessary adjustments.
In case of balance sheet of company, authorised capital, issued capital and profit and loss should be shown
(7) Principle of Loan: The following points are considered while showing loan taken by business in the balance sheet:
Loan taken for business from other parties should be shown separately in the balance sheet.