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Accounting For Managers - Basics of Accounting

Nature And Meaning Of Accounting Principles

   Posted On :  21.01.2018 07:03 am

What is an accounting principle or concept or convention or standard? Do they mean the same thing? Or does each one has its own meaning? These are all questions for which there is no definite answer because there is ample confusion and controversy as to the meaning and nature of accounting principles. We do not want to enter into this controversial discussion because the reader may fall a prey to the controversies and confusions and lose the spirit of the subject.

The rules and conventions of accounting are commonly referred to as principles. The american institute of certified public accountants has defined the accounting principle as, “a general law or rule adopted or professed as a guide to action; a settled ground or basis of conduct or

 

practice”. It may be noted that the definition describes the accounting principle as a general law or rule that is to be used as a guide to action. The canadian institute of chartered accountants has defined accounting principles as, “the body of doctrines commonly associated with the theory and procedure of accounting, serving as explanation of current practices and as a guide for the selection of conventions or procedures where alternatives exist”. This definition also makes it clear that accounting principles serve as a guide to action.

 

The peculiar nature of accounting principles is that they are manmade. Unlike the principles of physics, chemistry etc. They were not deducted from basic axiom. Instead they have evolved. This has been clearly brought out by the canadian institute of chartered accountants in the second part of their definition on accounting principles: “rules governing the foundation of accounting actions and the principles derived from them have arisen from common experiences, historical precedent, statements by individuals and professional bodies and regulation of governmental agencies”. Since the accounting principles are man made they cannot be static and are bound to change in response to the changing needs of the society. It may be stated that accounting principles are changing but the change in them is permanent.

 

Accounting principles are judged on their general acceptability to the makers and users of financial statements and reports. They present a generally accepted and uniform view of the accounting profession in relation to good accounting practice and procedures. Hence the name generally accepted accounting principles.

 

Accounting principles, rules of conduct and action are described by various terms such as concepts, conventions, doctrines, tenets, assumptions, axioms, postulates, etc. But for our purpose we shall use all these terms synonymously except for a little difference between the two terms – concepts and conventions. The term “concept” is used to connote accounting postulates i.e. Necessary assumptions or conditions upon which accounting is based. The term convention is used to signify customs or traditions as a guide to the preparation of accounting statements.

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