Accounting Principles and Accounting Equation


Accounting Principles and Accounting Equation

Definition and Explanation:

Accounting is the language of business. Affairs of a business unit are made understood to others as well as to those who own or manage it through accounting information which has to be suitably recorded, classified, summarized and presented.

In order to make this language to convey the same meaning to all people, it is necessary that it should be based on certain uniform scientifically laid down standards. These standards are termed as accounting principles. Accounting principles may be defined as those rules of action or conduct which are adopted by the accountants universally while recording accounting transactions. In the absence of common principles there will be a chaotic situation and every accountant will have his own principles. Not only the utility of accounts will be less but these will not be comparable even in the same business. Therefore, it become essential that common principles should be followed for measuring business revenues and expenses.

Essential Features of Accounting Principles:

Accounting principles are accepted if they satisfy the following norms:

Usefulness:

A principle will be relevant only if it satisfies the needs of those who use it. The accounting principles should be able to provide useful information to its users otherwise it will not serve the purpose.

Objectivity:

A principle will be said to be objective if it is based on facts and figures. There should not be a scope for personal bias. If the principle can be influenced by the personal bias of users, it will not be objective and its usefulness will be limited.

Feasibility:

The accounting principle should be practicable. The principles should be easy to use otherwise their utility will be limited.

Classification of Accounting principles:

Accounting principles can be classified into two kinds:

  1. Accounting Concepts:

    The term concepts includes those basic assumptions or conditions upon which accounting is based. Click here to read full article.

  2. Accounting Conventions:

    The term “conventions” includes those customs or traditions which guide the accountants while preparing the accounting statements. Click here to read full article.

Accounting Equation:

Dual aspect may be stated as “for every debit, there is a credit.” Every transaction should have twofold effect to the extent of the same amount. This concept has resulted in accounting equation which states that at any point of time the assets of any entity must be equal (in monetary terms) to the total of equities. Click here to read full article.

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