law of Accounting and Accounting Assumptions

Law Of Diminishing Returns Business Definition - law of Accounting and Accounting Assumptions

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In the modem world no business can afford to remain secretive because various parties such as creditors, employees, taxation authorities, investors, communal and government etc., are concerned to know about the affairs of the business. Affairs of the business can be studied mainly by consulting final accounts and the balance sheet of the particular business. Final accounts and the balance sheet are end products of book-keeping. Because of the importance of these statements it became valuable for the accountants to establish 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 prepared by the accountants. The need for 'generally standard 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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Law Of Diminishing Returns Business Definition

There is no agreement among the accountants as regards the basic concepts of accounting. There is no uniformity in generally standard accounting ideas (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 general 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 friction with other principles.

Postulates

Mean to assume without proof, to take for granted or certain 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 manufacture them enforceable to some extent.

Doctrines

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

Axiom

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

Standards

Refer to the basis improbable in accounting practice, under separate circumstances. In Indian context, the establish 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 notice the applicable laws, customs, usages and business environment.

Accounting Assumptions

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

(1) Going concern

In the ordinary course, accounting assumes that the business will continue to exist and carry on its operations for an indefinite duration in the future. The entity is assumed to remain in performance 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 balance sheet which is prepared on the basis of description of facts on historical costs cannot show the true or real worth of the concern at a particular date. The underlying principle there is that the earning power and not the cost is the basis for valuing a lasting business. The business is to continue indefinitely and the financial and accounting policies are followed to contend the continuity of the business unit.

(2) Consistency

There should be uniformity in accounting processes and policies from one duration to another. Material changes, if any, should be disclosed even though there is revising in technique. A turn of formula from one duration to other will work on the succeed 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 recognize non-cash events and circumstances as they occur. Accrual is concerned with improbable hereafter cash receipts and payments: it is the accounting process of recognizing assets, liabilities or revenue for amounts improbable to be received or paid in future. Base 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 description of all expenses and incomes relating to the accounting duration whether actual cash has been disbursed or received or not. If a underlying accounting assumption (i.e. Going concern, consistency and accrual) is not followed (in the preparation of financial statements) the fact should be disclosed. [As-I para 27].

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