theory of Accounting and Accounting Assumptions

Accounting - theory of Accounting and Accounting Assumptions

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In the modem world no firm can afford to remain secretive because assorted parties such as creditors, employees, taxation authorities, investors, communal and government etc., are interested to know about the affairs of the business. Affairs of the firm can be studied in general by consulting final accounts and the equilibrium sheet of the singular business. Final accounts and the equilibrium sheet are end products of book-keeping. Because of the importance of these statements it became principal for the accountants to form some principles, concepts and conventions which may be regarded as fundamentals of accounting. Such fundamentals having wide acceptance give reliability and creditability to the financial statements ready by the accountants. The need for 'generally approved accounting principles' arises for two reasons: First, to be logical and consistent in recording the transactions and second, to conform to, the established practices and procedures.

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Accounting

There is no deal among the accountants as regards the basic concepts of accounting. There is no uniformity in generally approved accounting law (Gapp). The terms-axioms, assumptions, conventions, concepts, generalizations, methods, rules, doctrines, techniques, postulates, standards and canons are used freely and inconsistently in the same sense.

Principles

"A normal law or rule, adopted or professed as a guide to action, a placed ground or basis of show the way or practice." This definition given by dictionaries comes nearest to describing what most accountants mean by the word 'Principle'. Care should be taken to make it clear that as applied to accounting practice, the world principle, does not connote a rule for which there can be no deviation. An accounting principle is not a principle in the sense that it admits of no disagreement with other principles.

Postulates

Mean to assume without proof, to take for granted or determined consent, a position assumed as self- evident. Postulates are assumptions but they are not arbitrary deliberate assumptions but generally recognized assumptions which reflect the judgment of 'facts' or trend or events, assumptions which have been borne out in past by facts supposed by legal institutions production them enforceable to some extent.

Doctrines

Mean law of belief: what the scriptures teach on any subject. It refer to an established principle propagated by a educator which is followed in literal, faith. But in accounting practice, no such doctrine need be adhered to but the word denotes the normal law or policies to be followed.

Axiom

Denotes a statement of truth which cannot be questioned by anyone.

Standards

Refer to the basis anticipated in accounting practice, under dissimilar circumstances. In Indian context, the form of Chartered Accountants of India (Icai) constituted an Accounting Standards Board on 21st April, 1977. The main function of Asb is to formulate accounting standards taking into observation the applicable laws, customs, usages and firm environment.

Accounting Assumptions

The International Accounting Standards Committee (lAsc) as well as the form of Chartered Accountants of India (Icai) treat (vide Ias-I & As-I) the following as the basic accounting assumptions:

(1) Going concern

In the ordinary course, accounting assumes that the firm will continue to exist and carry on its operations for an indefinite period in the future. The entity is assumed to remain in operation sufficiently long to carry out its objects and plans. The values attached to the assets will be on the basis of its current worth. The assumption is that the fixed assets are not intended for re-sale. Therefore, it may be contended that a equilibrium sheet which is ready on the basis of narrative of facts on historical costs cannot show the true or real worth of the concern at a singular date. The basic principle there is that the earning power and not the cost is the basis for valuing a chronic business. The firm is to continue indefinitely and the financial and accounting policies are followed to verbalize the continuity of the firm unit.

(2) Consistency

There should be uniformity in accounting processes and policies from one period to another. Material changes, if any, should be disclosed even though there is correction in technique. A change of formula from one period to other will influence the effect of the trading materially. Only when the accounting procedures are adhered to consistently from year to year the results disclosed in the financial statements will be uniform and comparable.

(3) Accrual

Accounting attempts to identify non-cash events and circumstances as they occur. Accrual is involved with anticipated time to come cash receipts and payments: it is the accounting process of recognizing assets, liabilities or wage for amounts anticipated to be received or paid in future. Tasteless examples of accruals comprise purchases and sales of goods or services on credit, interest, rent (not yet paid), wages and salaries, taxes. Thus, we make narrative of all expenses and incomes relating to the accounting period either actual cash has been disbursed or received or not. If a basic accounting assumption (i.e. Going concern, consistency and accrual) is not followed (in the making ready of financial statements) the fact should be disclosed. [As-I para 27].

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