But this year, i.e., in 2019 house owner wants a rent in advance for next year, i.e., 2020. Matching principle works on an accrual basis thus, focuses on the occurrence of the event and not on the receipt of the payment.įor Example, Income of X is 2,00,000 for the accounting year 2019 and has only one expense, i.e., rent of 80,000 annually. Its value will not increase in the books of accounts.Īccording to this principle, the expenses and revenue should be matched for the current accounting year, i.e., if the revenue has recognised, cost of goods sold should also be charged in the same accounting period irrespective of the cash being received or not. In that case, however, it is a valuable asset for a company, but it will not get recorded as no amount has been paid to acquire such an asset.Īnother example of Historical Cost principle is, suppose the land was purchased for 20,00,000 in 2015, now the value of that land has increased to 50,00,000 in 2020. The land is already recorded in the records for 20,00,000 and will be recorded on the same untill it has been realized. Suppose, no amount has been paid for buying an asset such as a company’s reputation. Historical Cost Principle is based on the acquisition cost recorded in the books of accounts, i.e., the cost paid to acquire the asset will be recorded in the books of accounts, and that cost will become a base for further accounting of such asset. However, the revenue gets recognised in the earning year financial statement, whether it has been received or not. In the case of the agency relationship, the commission amount is considered as revenue income. Revenue Recognition Principle by its name only defines that it is related to the ‘recognized revenue’ of a company. Here, revenue is a gross inflow of cash from the business activities, done throughout the year by the sale of goods, providing services, etc. Similarly, the dual impact on the purchasing party would be The dual impact on the selling party would be If any entry gets debited, it will get credited too.Īccording to this principle, both the parties involved in the transaction will have a dual impact of a particular transaction. This will help in recognizing the loops of the business and the reasons behind losses on the basis of which necessary measures can be adopted to avoid such losses in the subsequent years of business.ĭuality Principle of accounting is based on the dual facets of the entries made in the records, the example of this principle is the double-entry system of accounting in which every entry has a dual effect, i.e., “Debit” and “Credit”. So, the profit/loss can be compared every year from the previous year. In general, the profit/loss of the business is computed on the basis of the accounting year, i.e., (From 1st April to 31st March) and computed every year. This principle is based on the particular time-period concept, i.e., accounting has to be done for a definite period. The following are some of the basic principles of accounting: It consists of accounting principles along with the methods of exercising such principles.įor developing accounting techniques, few rules are required essentially to regulate such techniques, and such rules are the basic accounting principles, navigating the style of recording and reporting of transactions. The rules derived from the experience and accepted universally becomes the principles when proved beneficial and such principles are known as “ Generally Accepted Accounting Principles” or “ GAAP”. Generally Accepted Accounting Principles.Thus, it is always advisable to the accountants to follow accounting principles while making the books of accounts of the business. So that the records should reveal the same information to everyone using the records to avoid the difficulties and confusions arising due to variation of patterns followed by every individual.Īs if rules are not set up, every individual will perform transactions according to their way, and it becomes impossible to compare such records and measure the reliability of the accounting statement.
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