Principles of Accounting and Accounting Assumptions

In the modem world no business can afford to remain secretive because various parties such as creditors, employees, taxation authorities, investors, public and government etc., are interested 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 necessary for the accountants to develop 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 accepted 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.

There is no agreement among the accountants as regards the basic concepts of accounting. There is no uniformity in generally accepted accounting principles (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 settled ground or basis of conduct 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 conflict with other principles.

Postulates

Mean to assume without proof, to take for granted or positive 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 making them enforceable to some extent.

Doctrines

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

Axiom

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

Standards

Refer to the basis expected in accounting practice, under different circumstances. In Indian context, the Institute 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 consideration the applicable laws, customs, usages and business environment.

Accounting Assumptions

The International Accounting Standards Committee (lASC) as well as the Institute of Chartered Accountants of India (ICAI) treat (vide IAS-I & AS-I) the following as the fundamental 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 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 balance sheet which is prepared on the basis of record 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 continuing business. The business is to continue indefinitely and the financial and accounting policies are followed to maintain the continuity of the business 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 improvement in technique. A change of method from one period to another will affect the result 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 expected future cash receipts and payments: it is the accounting process of recognizing assets, liabilities or income for amounts expected to be received or paid in future. Common examples of accruals include purchases and sales of goods or services on credit, interest, rent (not yet paid), wages and salaries, taxes. Thus, we make record of all expenses and incomes relating to the accounting period whether actual cash has been disbursed or received or not. If a fundamental 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].

Number Crunching is Just One Aspect of a Career in Accounting

You can expect anybody who is taking up accounting as a career to be a number crunching monster who always expects you to account for every penny that you spend in the general course. Even if you spend very little on something, it would always be too much for them. That’s how accountants are and nothing can be done about it. Moreover, it is a part of their job after all. These professionals are exceptionally good with numbers. Accountants, over a period of time, build up their own set of clients and that gives them two great options. They can either take up part-time assignments or can work from home. In the long run, this career also allows them to set up their own business eventually.

A good number of accountants are self employed. Most of these self employed accountants include certified “Chartered Accountants”. They work for multiple clients and charge a heavy sum of money for their services. The best part about this career option is that the demand for accounting services never goes down. On the contrary, it is always on the rise due to the booming economy. Well, even in times of recession, accountants are greatly in demand because all the companies are desperately trying to tighten and straighten their finances and all of them want to make sure that they are following safe and healthy accounting practices.

Apart from your ability to crunch numbers, you would also need a Bachelor’s degree in accounting and commerce from any university if you want to become an accounts professional. That’s your first step. It would normally take three years to get your bachelor’s degree. Once you have completed that, you can start off as an assistant to any reputed chartered accountant or join any business as an accountant. From thereon, n on, it all depends on how hard you work and how fast you learn, for you to climb up the corporate ladder. There is no dearth of opportunities in the industry. But it solely depends upon the individual approach to grab them.

The most important part of any professional education is the scope to earn. One naturally would want to know how much can he/she earn as an accountant? The answer is pretty simple and straight forward – in the accounting business, sky is the limit in terms of money one can make. It all depends upon your own interest, willingness to work, and of course the willingness to learn. But still, even if we consider on a very conservative basis, an accountant can earn from $34000 to over $94,000 a year. On an average, it is estimated that even ordinary accountants earn over $50,000 annually as salary. Moreover, the salary paid also varies slightly according to the industry you are working in. To sum up, one can say that accounting is a great employment option because this is one of those jobs where, you can always send in a fat bill to your client irrespective of the amount of time spent in the work!

Choosing an Accountant for a Start-Up Business

If you are about to start a business or have already got up and running, then you may not yet have thought about what happens when you reach the end of your first year of trading. It can seem a long way off and there are so many other things to worry about when setting up on your own so trying to find an accountant is not at the top of your priority list. But a good accountant, one that suits you and your business needs to be chosen carefully, not in a last minute rush as you approach the deadline for filing your accounts and completing your tax return.

So when you do have a spare moment in that busy first year do some research into your options for accountancy services. You can of course opt for a DIY approach, and this is perfectly possible if the business is fairly straightforward but even for simple companies, including one-man consultancies, do not under-estimate how time-consuming preparing your own accounts can be. Not only will it take plenty of your time but you may miss out on tax-saving advice that a decent accountant will include as part of their service. You will also be saved the hassle of completing your tax returns, both personal and business.

But just how do you know what constitutes a good accountant and where you can find one?
You could, of course, simply do an internet search of your local area and phone a few likely companies. You could ask for personal recommendations from people you already know with businesses of their own. Some people also post on small business forums but if you do that you risk being inundated with messages from accountants selling their services rather than genuine recommendations.

Some accountants work independently from home and it is tempting to believe that these will be a cheaper option but that is not necessarily the case. The disadvantage of a home based accountant (or indeed a one-man band in an office) is that there is no-one to fall back on if they, for example, become ill and are unable to work when you need them. And if their charges are not significantly lower this may not be a risk worth taking.

Also make sure the company handles businesses similar to yours either by industry or size. You don’t want to find you are using an accountant that predominantly deals with large corporations if you only employ 5 people or vice versa.

Will you have a dedicated accountant so that you speak to the same person or see the same person each time? Remember that large accounting companies often do not assign your business to a dedicated accountant so there is little opportunity to build up a good relationship with your accountant and for them to truly understand your business and any issues it may have. This can be a distinct disadvantage especially as you may find yourself having to bring the accountant up to speed on your business each time you talk to them.

Tax in general is a complicated issue but corporation tax even more so, therefore, getting to know your accountant will help build up trust that he or she is competent to handle your tax affairs and can help you to minimise your tax liability.

Here are 4 essential questions to ask any potential accountancy firms that you are considering:
• Will you be assigned a dedicated accountant?
• What type and size of businesses do they currently deal with?
• Is the accountant local so you can easily meet up?
• Do they offer a fixed fee accountancy service?

It goes without saying that the accountant you choose should be qualified either as a chartered accountant or a certified accountant. Another factor to bear in mind is how much you may want to ask for advice during the year – this is particularly relevant for new businesses as they grow and evolve whilst establishing themselves. If you want to have the option to seek specific advice but don’t want to be surprised by a large bill at the end of the year then consider an accounting firm that offer fixed fee accountancy services. These usually include various price options from a basic service to one including regular telephone support or face to face meetings.