Theory Base of Accounting
All About MBA TOPIC| Main aim of accounting is to
provide information about the financial performance of a firm to its various users such as Owners, Managers, Investors,
Creditors, suppliers of goods and services and
Tax Authorities so that they may take important decisions.
For making the accounting principle & concept information meaningful to an its-internal and external user, it’s important that such information is reliable as well as
comparable. The comparability of information is
required at both levels to make inter-firm comparisons and to make inter period comparisons. This is possible only when the
information provided is based on consistent accounting
policies, principles, and practices. This arises the need for developing a
proper theory base of accounting.
THEORY BASE OF ACCOUNTING
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| Source- accountingfoundation.org |
Theory base of accounting consists
of principles, concepts, conventions, rules, and guidelines developed over a period of time to bring uniformity and
consistency to the process of accounting in order to
enhance its utility to various users of accounting information. In addition, accounting standards issued by The Institute of
Chartered Accountants of India (ICAI) also constitute the theory base of
accounting.
Meaning of
Accounting Principle
MBA TOPIC | Earlier accounting statements were
largely needed by the proprietor. But nowadays the accounting statements are
needed by various parties who have an interest in the business, namely, proprietors, investors, creditors, government and many
others. Accounting statement disclose the profitability &
solvency of the business to various parties. It is,
therefore, necessary that such statements should be prepared according to the same
standard language and set rules.
These rules are called 'Generally Accepted Accounting Principles'
(GAAP). These principles have been generally accepted by
accountants all over the world as general guidelines for preparing the
accounting statement. (accounting principle & concept)
"Principle of Accounting is the general law or rule adopted or proposed
as a guide to action, a settled ground or basis of conduct or practice”.
Thus, Generally Accepted Accounting
Principles refer to the rules or guidelines adopted for recording & reporting of
business transactions, in order to bring uniformity in the preparation and
presentation of financial statements.
The Generally Accepted Accounting The principle has evolved over a long period of time on the basis of past experiences, usage or custom, statements by
individuals and professional bodies & regulations by government agencies
and have general acceptability among most accounting
professional.
Features of Accounting Principles
Following are the features or
characteristics of accounting principles
1. Accounting Principles Ensure Uniformity and
Understandability. Accounting Principles are a uniform
set of rules or guidelines recommended for use by all enterprises to ensure
uniformity and understandability.
2. Accounting Principles are Man-made. Accounting principles
are man-made. These principles are the best possible suggestions derived
from experience and reason. They lack
universal applicability like the principles of physics, chemistry and other
natural sciences.
3.
Accounting Principles are rot Static but Flexible. Accounting principles are
not static or permanent. These change with
time in response to the changes in business
practices, government policies, and needs of the users of accounting
information.
4.
Accounting Principles are Generally Accepted. The general acceptability of an accounting principle usually depends upon
how well it meets the criteria of relevance, objectivity, and feasibility.
(i) Relevance. Accounting Principles are
relevant if they result in information that’s useful to the user of accounting
information.
(ii) Objective. Accounting Principles are
objective if they aren’t influenced by the personal bias of the persons
preparing the accounting information.
(iii) Feasible.
Accounting Principles are feasible if they can be applied without undue complexity
& cost.
The need for Accounting Principles
In order to make the accounting information
meaningful to its internal and external users,
it is significant that such information is reliable as well as comparable. The
comparability of information is required to see
how a firm has performed as compared to
the other firms and how it has performed as compared to the previous years.
This becomes possible only if the
information provided by the financial statement is based
on some set rules are known as policies, principles
and conventions. These rules (usually called
GAAP) bring uniformity and consistency to the process of accounting and enhance its utility to different users of accounting
information.
We hope you like this article (accounting principle & concept) & also help you to know about MBA TOPIC.
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