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Answer Posted / ranjeesh.k.k
Ground rules of accounting that are (or should be) followed
in preparation of all accounts and financial statements. The
four fundamental concepts are (1) Accruals concept: revenue
and expenses are taken account of when they occur and not
when the cash is received or paid out; (2) Consistency
concept: once an entity has chosen an accounting method, it
should continue to use the same method, except for a sound
reason to do otherwise. Any change in the accounting method
must be disclosed; (3) Going concern: it is assumed that the
business entity for which accounts are being prepared is
solvent and viable, and will continue to be in business in
the foreseeable future; (4) Prudence concept: revenue and
profits are included in the balance sheet only when they are
realized (or there is reasonable 'certainty' of realizing
them) but liabilities are included when there is a
reasonable 'possibility' of incurring them. Also called
conservation concept. Other concepts include (5) Accounting
equation: total assets of an entity equal total liabilities
plus owners' equity; (6) Accounting period: financial
records pertaining only to a specific period are to be
considered in preparing accounts for that period; (7) Cost
basis: asset value recorded in the account books should be
the actual cost paid, and not the asset's current market
value; (8) Entity: accounting records reflect the financial
activities of a specific business or organization, and not
of its owners or employees; (9) Full disclosure: financial
statements and their notes (footnotes) should contain all
pertinent data; (10) Lower of cost or market value:
inventory is valued either at cost or the market value
(whichever is lower) to reflect the effects of obsolescence;
(11) Maintenance of capital: profit can be realized only
after capital of the firm has been restored to its original
level, or is maintained at a predetermined level; (12)
Matching: transactions affecting both revenues and expenses
should be recognized in the same accounting period; (13)
Materiality: relatively minor events may be ignored, but the
major ones should be fully disclosed; (14) Money
measurement: accounting process records only those
activities that can be expressed in monetary terms (with
some exceptions, as in cost-accounting); (15) Monetary
measurement: only the activities measurable in terms of
money should be recorded; (16) Objectivity: financial
statements should be based only on verifiable evidence,
comprising an audit trail; (17) Realization: any change in
the market value of an asset or liability is not recognized
as a profit or loss until the asset is sold or the liability
is paid off (discharged); (18) Unit of measurement:
financial data should be recorded with a common unit of
measure (dollar, pound sterling, yen, etc.). Also called
accounting conventions, accounting postulates, or accounting
principles.
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