14 Must-Know Accounting Principles for Every B.Com Student

What are the 14 Accounting Principles

The fourteen principles of accounting serve as an ethical guide in maintaining true and fair financial reporting. It assists the accountants in managing everything from cash inflow (revenue identification) to cash outflow (expense distribution).

The 14 Principles of Accounting

Detailed Key Accounting Principles Every BCom Student Should Know

The following are the core 14 accounting principles that every B.Com student must study to grasp the foundation of basic accounting practices:

1. Accrual Principle: The accrual principle of accounting requires transactions to be recorded at the time when they occur, regardless of when the cash flow transactions happen. The use of the accrual accounting principle is to reflect the actual timing of revenue and expenses. The reason behind the accrual principle is how companies operate. Since many businesses sell on credit and get paid later, waiting to record the revenue until cash is received would surely give a misleading picture of the financial position.

2. Consistency Principle: The consistency principle states that a business should maintain the same accounting methods. This ensures that the financial statements are comparable and that one can draw conclusions from the information. Also, as per the consistency principle, any change in the method of accounting over time must be disclosed. If the business keeps changing accounting methods, it will only create chaos and confusion in the statements.

3. Historical Cost Principle: The cost principle implies that the assets should be recorded and valued at their original/historical purchase cost. This principle brings stability for recording the cost of assets, liabilities, and other investments. The historical cost principle prevents overvaluation of an asset.

4. Conservatism Principle: This principle acts as a form of financial caution, ensuring that the financial statements do not exaggerate the financial position of the business. Under this principle, the accountant must make sure that the probable losses are recorded when they are discovered, while revenues can only be registered when they are fully realised.

5. Objectivity Principle: The objectivity principle eliminates the chances of the financial statements of a company ever being influenced by any bias or personal influence. It refers to the concept of considering the financial statements as solid evidence.

6. Economic Entity Principle: The principle states that the recorded activities of a business entity should be kept separate from the recorded activities of its owner and any other business entities.

7. Monetary Unit Principle: The monetary unit principle indicates that only transactions that can be measured in monetary terms/units are recorded. This is done to ensure that there is clarity and relevance of financial transactions by requiring that transactions be recorded in money (currency) format. The reason behind this principle is that it allows for consistent value assessment and even comparison.

8. Time-Period Principle: The time-period principle presumes that organisations and companies can divide their activities into time periods. It states that businesses should report their financial results over a time period, such as monthly, quarterly, or annually, as it enables a fair comparison across different time frames.

9. Matching Principle: It is an accounting principle that is used to record revenues and expenses. The matching principle states that the expenses must be matched with the revenues within the same accounting period. Businesses will obtain a proper idea of profitability during a specific time frame with its help.

10. Full Disclosure Principle: As the name suggests, this accounting principle aims for the financial reports to provide a clear picture of the business's financial condition. It is really important to disclose information about the events that have a material impact on the financial position.

11. Materiality Principle: This principle states that an accounting standard can be ignored unless the financial information is significant enough to influence decision-making. It requires the information to be accurately recorded and reported.

12. Revenue Recognition Principle: As per this principle, the revenue is recognized when it is realized and not when cash is received. The revenue recognition principle states that revenue should be recorded when the goods are delivered, regardless of when payment is received.

13. Going Concern Principle: It is similar to the going concern concept, when the accountants assume that the business will continue to operate unless there is proper evidence to suggest the opposite. These principles influence the decisions on how assets and liabilities are valued.

14. Reliability Principle: The reliability principle indicates that the financial information must be precise, consistent, and verifiable. This principle ensures that the data recorded is accurate to actual transactions. By adhering to this principle, accountants can ensure that the financial statements reflect the current financial position and performance of the business.