Accounting For Managers - Basics of Accounting
Nature And Meaning Of Accounting Principles
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.
