What are Accounting Principles?

Accounting Principles are the standardised guidelines, conventions and concepts that govern the preparation, presentation and interpretation of financial statements. They ensure that financial information is consistent, comparable, reliable and relevant across different entities and time periods.

In India, accounting principles are embedded in the Accounting Standards (AS) issued by ICAI for non-Ind AS entities, and the Indian Accounting Standards (Ind AS) issued by MCA for specified companies. Both sets are broadly based on international accounting frameworks.

Key Accounting Principles

• Accrual Principle: Revenue is recognised when earned; expenses when incurred — regardless of when cash flows. This is the basis of Ind AS and Indian GAAP. Mandatory for all companies under the Companies Act, 2013.
• Going Concern Principle: Financial statements are prepared assuming the entity will continue in operation for the foreseeable future. If the entity faces closure, financial statements must be prepared on a break-up basis.
• Consistency Principle: Once an accounting method is chosen (e.g., FIFO for inventory, WDV for depreciation), it must be applied consistently across all periods. Changes must be disclosed with reasons and quantitative impact.
• Prudence (Conservatism) Principle: Anticipate no profits but provide for all probable losses. Do not overstate assets or income; do not understate liabilities or expenses. E.g., creating provision for bad debts even before actual default.
• Matching Principle: Expenses must be matched with the revenue they help generate in the same accounting period. E.g., depreciation on a machine is spread over its useful life to match with revenue earned using that machine.
• Materiality Principle: Only items that are significant enough to influence the decisions of a reader of financial statements need to be separately disclosed. Immaterial items may be combined or aggregated.
• Business Entity Concept: The business is treated as a separate legal and accounting entity from its owner. Owner's personal transactions are not mixed with business transactions.
• Monetary Measurement Concept: Only transactions that can be measured in monetary terms are recorded in accounting. Non-monetary factors (employee morale, brand reputation) are excluded.
• Historical Cost Principle: Assets are recorded at their original cost of acquisition. Market value fluctuations are generally not recorded unless there is an impairment or revaluation (under certain Ind AS standards).
• Dual Aspect (Double Entry) Principle: Every transaction has two aspects — a debit and a credit of equal amounts — maintaining Assets = Liabilities + Equity at all times.
• Full Disclosure Principle: All material information that could affect the decisions of financial statement users must be disclosed — either in the statements themselves or in the notes.
• Time Period Assumption: Business activities are divided into specific time periods (monthly, quarterly, annually) for reporting purposes, even though the business operates continuously.

Deviation from Accounting Principles

Auditors are required to report any deviation from established accounting principles under the Companies (Auditor's Report) Order (CARO) and the Standards on Auditing. Material deviations may result in a qualified or adverse audit opinion.

Frequently Asked Questions