To maintain the consistency and uniformity while preparing and presenting the financial statements of the entity, certain principles have been developed which are called as concepts, conventions, principles, assumptions, postulates etc. and these all are considered to be the theory base of accounting.
The term ‘principle’ has been defined by AICPA as ‘A general law or rule adopted or professed as a guide to action, a settled ground or basis of conductor practice.’
Advantages of Generally accepted accounting principles:
These Generally Accepted Accounting Principles are important due to the following reasons:
1. These principles are the constraints or parameters within which the financial records are prepared.
2. These principles ensure that the financial records prepared by every organization are uniform. If all the organizations start their own basis of preparation of financial records that it may lead to utter confusion and the financial statements of the different entities becomes incomparable.
Accounting principles are further categorized into two parts i.e., Accounting Concepts and Accounting Conventions.
Accounting concepts are basically the assumptions, rules or fundamental ideas that are considered to be the basis of the preparation and presentation of financial statements of a business entity. These accounting concepts have the universal application. These concepts are the foundation for formulating the accounting principles.
Advantages of accounting concepts:
1. The application of accounting concepts is involved at every stage of recording a business transaction into the books of accounts.
2. It saves lot of time & cost as there is no need to set a procedure every time when there is a reporting of a transaction because the framework is already pre-defined.
3. Most importantly accounting concepts brings uniformity in the preparation and presentation of financial records thereby making the comparisons from past years and from competitors financial performance easy.
The various accounting concepts are as follows:
1. Business Entity Concept
2. Money Measurement Concept
3. Accrual Concept
4. Matching Concept
5. Going Concern Concept
6. Cost Concept
7. Revenue Recognition Concept
8. Dual Aspect
9. Accounting Period Concept
10. Objectivity Concept
Accounting conventions are the guidelines framed to clarify the accounting treatment of the ambiguous transactions and they are adopted over the period of time as these conventions are derived by usage and practice. The application of accounting conventions is not uniform and universal. Therefore, there are chances that there can be biasness in the adoption of these conventions.
Advantages of accounting conventions:
1. Accounting conventions helps in making important decisions of the business in terms of reporting of transactions. For example the conservatism principle states losses should be reported even if the chances are low but the profits are to be recorded when there is certainty about the realization of such profits.
2. Accounting conventions help the management to disclose only those transactions that can have impact on the users other than the monetary transactions thereby saving time to record every minor transaction.
The four accounting conventions are as follows: