Accounting is the procedure of measurement, entering, sorting, sum uping, reading of numerical informations and pass oning the findings of operational consequence to the concerned parties. The individual in charge of accounting is known as comptroller. Accounting allows the company to analyse the fiscal public presentation of the concern, and expression at statistics such as net net income.
Accounting has to follow certain rules and construct for entering fiscal dealing. Without accounting rules we can non maintain systematic and proper accounting.
Following are the basic rules of accounting:
Accrual Concept:
It is the construct which is used while fixing net income and loss statement. It was created and was introduced in accounting as a rule of Companies Act in 1985. This construct determines that the grosss and disbursals are recognized when they are earned or incurred by the company.
Examples:
Concert tickets are sold yearss before the existent show, the payment received is non considered as gross because the event is yet to happen.
An accounting house obtained its office on rent and paid $ 180000 on January 1. It does non enter the payment as an disbursal because the edifice is non yet used. While fixing the quarterly repot on March 31, the house expensed out three months ‘ rent i.e. $ 45,000 [ $ 180000/12*3 ] because 3 months equivalent of clip has expired.
Business minutess are recorded when they occur and non when the related payment are received or made. It is cardinal to the utility of fiscal accounting information.
Traveling Concern Concept:
This construct states that the concern is established to go on its dealing for a long period of clip. It means concern will go on to run for a long period of clip. So, assorted balances of assets and liabilities are carried frontward to the following twelvemonth.
Examples:
An oil and gas house runing in Arab is stopped by a Arabian tribunal from transporting out operations in Arab. The house is non a traveling concern in Arab, because it has to close down.
A nationalized refinery is in hard currency flows jobs but the authorities of the state provided a warrant to the refinery T assist it out with all payments, the refinery is a traveling concern despite hapless fiscal place.
The hearers of the company determine whether the company is a traveling concern or non at the day of the month of the fiscal statement.
Business Entity Concept:
Harmonizing to this construct the concern organisation and concern proprietor are two different entities. By this construct a concern has nil to make with personal dealing of its proprietor
Examples:
A concern proprietor received $ 1000 measure for public-service corporations. He paid the whole sum utilizing his concern account $ 700 is to be considered a backdown because merely $ 300 ( 1/3rd ) is related to concern and the other $ 700 was for domestic intent.
Assuming each public accounting concern is required to pay $ 200 to a local association of CPAs each month. If the CPA pays that sum from a personal bank account the sum shall be considered extra capital.
Businesss are organized either as a proprietary, a partnership or a company. They differ in degree of control of the concern, but in all signifiers the personal minutess of the proprietor are non assorted up with the minutess and histories of the concern.
Monetary Unit Premise:
Harmonizing to this construct, accounting records merely those activities which can be expressed or measured in pecuniary footings. Events or dealing which can non be expressed in footings of money are non recorded in the book of histories.
Examples:
The company ‘s belongings, works and equipment on 2010 balance sheet amounted to $ 3 billion. During 2011 rising prices was 10 % . The pecuniary unit and stable dollar premise prohibits any accommodation to current or anterior period figures to account for the rising prices.
Oil spill in Nigeria was a natural catastrophe but accounting merely reports the fiscal impact in the signifier of claim paid, amendss paid, killing costs, etc. This is due to the restriction imposed by the pecuniary unit premise.
One facet of the pecuniary unit premise is that currencies lose their buying power over clip due to rising prices, but in accounting we assume that the currency units are stable in value. This is instead called stable dollar premise.
Time Period Concept:
The clip period construct implies that for the intent of describing fiscal information, the whole life of concern is separated into fanciful clip intervals. Each clip period is called an accounting period. At the terminal of each accounting twelvemonth, fiscal statements are drawn to determine the net income or loss and the fiscal place of the concern, and are reported to their users such as proprietors, directors and creditors.
One given of the clip period construct is that we have to do estimations at the terminal of the clip period to correctly to make up one’s mind which events need to be reported in the current clip period and which 1s in the following.
Gross acknowledgment and duplicate rules are harmonious to clip period premise. Revenue acknowledgment rule provides counsel on when to enter gross while fiting construct Tells us how to make an accurate net income figure by making 1-1 correspondence between grosss and disbursals.
Full Disclosure Principle:
Full revelation rule is harmonious to materiality construct. It requires that all material information has to be disclosed in the fiscal statements or in the notes to fiscal statement.
Examples:
Accounting policies has to be disclosed because they help to understand the footing of accounting.
Compeling events happening after the day of the month of the fiscal statements but before the issue of fiscal statement demand to be disclosed.
Tax rate is expected to alter in close hereafter. This information needs to be disclosed.
The company sold one of its subordinates to the partner of its managers. This information is material and need to be disclosed.
Detailss of unexpected liabilities, contingent assets, legal proceedings, etc. are besides germane to the determination devising of users and therefore necessitate to be disclosed.
Historical Cost Concept:
Accounting is concerned with the anterior events and it requires flexibleness and comparison that is why it requires the accounting minutess to be recorded at their historical costs. This is called historical cost construct.
Examples:
200 units of an point were purchased one month back for $ 20 per unit. The monetary value today is $ 25 per unit. The stock list shall look on balance sheet at $ 4,000 and non at $ 5,000.
The company built its ERB in 2006 at a cost of $ 50 million. In 2010 it is estimated that the present value of the future benefits attributable to the ERB is $ 1 billion. The ERB shall stand on balance sheet at its historical costs less accrued depreciation.
Matching Concept:
The rule that requires a company to fit disbursals with related disbursals with related grosss in order to describe a company ‘s profitableness during a specified clip interval. Ideally, the matching is based on a cause and consequence relationship. If a cost can non be linked to grosss or to an accounting period, the disbursal will be recorded instantly.
Examples:
$ 3,000,000 worth of gross revenues is made in 2011. Entire purchases of stock list were $ 2,000,000 of which $ 100,000 remained on manus at the terminal of 2011. The cost of net incomes is $ 3,000,000 gross is $ 1,800,000 [ $ 2,000,000 minus $ 200,000 ] and this should be recognized in 2011 thereby giving a gross net income of $ 2,200,000.
An office pays $ 20,000 per month to 5 of its employees. Monthly gross revenues are $ 500,000. $ 100,000 worth of monthly wages should be matched with $ 500,000 of gross generated.
Relevance and Dependability:
In relevancy information should be relevant to the determination doing demands of the user.
In dependability information is dependable if a user can depend upon it to be really accurate and if it is dependably represents the information that it aims to show.
Examples:
Before the day of the month of issue of balance sheet a company wants to cover with its subordinates and is in concluding phases of making a trade but the result is still unsure. If the company waits they are expected to happen more dependable information but it would be them relevancy. The information would be outdated and no longer really relevant.
After the balance sheet day of the month during the clip when audit is carried out, it becomes clear which debts were realized and where were non hence it improves the dependability of allowance for bad debts estimation but the information loses its relevancy due to excessively much clip being taken. Timeliness is cardinal to relevance.
Gross Recognition Principle:
Harmonizing to this rule, grosss are recognized when they are realized or realizable, and earned, no affair when hard currency is received. Cash can be received in an earlier or later period than duties are met and related grosss are recognized that consequences in the undermentioned two types of histories:
Accrued gross.
Deferred gross.
Examples:
A monthly magazine receives 2,000 subscriptions of $ 240 to be paid at the beginning of the twelvemonth. Each month it recognizes gross deserving $ 20,000 [ ( $ 240/12 ) *2,000 ] .
A media company recognizes gross when the ads are aired even before the payment has been made.
