Accounting principle includes basic assumptions and conditions on which science of accounting is based. Accounting principles which serve as the rules of accounting and helps in preparing financial statements are generally termed as “GENERALLY ACCEPTED ACCOUNTING PRINCIPLES” OR GAAP. The basic purpose of these accounting principles is to make financial data reliable and informative.
Basic principles of accounting are:
Going concern principle- According to this principle, it is believed that company will go on forever and there is no possibility of its wind up in near future.
Accrual principle- This principle states that accounting transactions should be recorded in the accounting period when they actually occur irrespective of the cash flow associative with them.
Conservatism principle- According to this principle, it is believed that expenses and losses must be considered first and then all profits and gains.
Full disclosure principle- This principle states that all the information related to business transactions which may affect reader’s understanding of that financial statement must be disclosed.
Matching principle- According to this principle, when you record revenue, you should record all related expenses at the same time. For example: while purchasing inventory we must deduct the amount at the time of recording inventories.
Cost accounting- This principle states that business should record its assets and liabilities at their original purchasing price. But the principle is getting less valid as nowadays assets and liabilities are recorded at their fair value.
Time period principles- This principle states that a business should report the results of its operations over a standard period of time. One year is considered as a standard period.