Convention Used in Modern Systems of Accounting

Topics: Balance sheet, International Financial Reporting Standards, Bookkeeping Pages: 7 (1958 words) Published: January 17, 2013
  | Meaning of Accounting Principle|
Principle means a general law or rule adopted or professed as a guide to action ‘a settled ground or a basis of conduct or practice’. The word ‘Principle’ when applied in accounting may have different meanings in different contexts. It is not used in the sense of a fundamental accounting truth – it connotes a guiding influence or an accepted rule of action or conduct. 

Accounting principles have been defined as the body of doctrine, commonly associated with the theory and procedure of accounting, serving as an explanation of current practices and as a guide for the selection of conventions or procedures where alternative exist. 

In simple words, ‘Accounting Principles’ may be defined as those rules of conduct or procedure which are adopted by the accountants universally for recording and reporting of financial data. These principles bring about uniformity in the practice of accounting. | | Generally Accepted Accounting Principles (GAAP)|


Accounting is a practical activity. Historically, the accounting professionals have not been very much concerned about the theoretical base of their profession. But gradually their job has been regarded as supplier of financial information for use by the economic decision makers. With the growth in business and financial activities, this job of an accountant is being put under scrutiny. They have to satisfy all the users of their financial statements. They have to apply certain concepts, conventions and postulates while preparing and presenting accounting information for the assistance of decision makers. The consensus view of the persons engaged in the accounting profession relating to: a. which economic resources and obligations should be recorded as assets and liabilities in financial accounting,

b. which changes in assets and liabilities should be recorded, c. when these changes should be recorded,
d. how the assets and liabilities and changes in them should be measured,  e. what information should be disclosed;
f. how it should be disclosed; and 
g. which financial statement should be prepared. 

This are referred to as Generally Accepted Accounting Principles (GAAP). GAAP’s thus helps to bring about uniformity in the reporting of financial events of the entities across the industry. 

Generally Accepted Accounting Principles (GAAP) is a guide to the accounting profession in the choice of accounting techniques for the purpose of recording, preparing and presenting the financial statements. |  |

| Characteristics / Features of Accounting Principles|

The characteristics of Accounting Principles are:

a. Accounting principles are made and developed by men (accountants) and, as such, they do not have the authoritativeness of universal principles, like other natural sciences, viz. Physics, Chemistry, Mathematics etc. It is en empirical science i.e. based on what is experienced or seen.

b. The general acceptance of an accounting principle usually depends on how well it satisfies three criteria: Relevance, Objectivity and Feasibility. The word ‘relevant’ implies that the information will be useful to the users. The word ‘objectivity’ implies that the recorded data are reliable and verifiable. The word ‘feasibility’ implies that the implementation of the principle in practice will be without much complexity and cost. 

c. Accounting principles cannot be validated /proved by reference to natural laws, as in the case of physical sciences. They are the best possible suggestions based on practical experiences, reasons and observations which have been developed by the persons/authorities engaged in the accounting profession over the years. 

d. Accounting principles are developed for common usage to ensure uniformity and understandability. 

e. Accounting principles are in the process of evolution, i.e., they are not in their finished form. On the other hand, they are...
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