7. Cost or Historical Cost Principle :
According to this Principle, an assets is recorded in the books of accounts at its original cost comprising cost of acquisition and all expenditure incurred for making the assets ready to use.
This cost becomes the basis of all subsequent accounting transactions for the asset, since the acquisition cost relates to the past, it is referred to as Historical cost.
Example : Machinery purchased for ϕ 1,50,000 in cash and ϕ 5,000 was spent for installation of machine and ϕ 15,000 spent on carriage of machine. Then the cost of machine ϕ 1,70,000 will be in the books and depreciation will be charged on this cost. If market value of machine due to inflation has gone up to ϕ 2,00,000, then the increased value will not be recorded.
This cost is systematically reduced from year after year by charging depreciation and the assets are shown in the balance sheet at book value (cost-dep.). This principle brings objectivity into the accounts.
8. Matching Principle :
According to this principle, all expenses incurred by any enterprise during an accounting period are matched with the revenue recognized during the same period.
The matching principle facilitates to ascertain the amount of profit / loss incurred in a particular period by deducting the related expenses from the revenue recognized that period.
The following treatment of expenses and revenue are done due to matching principle :
1. Ascertainment of Prepaid Expenses
2. Ascertainment of income received in advance.
3. Accounting of closing stock.
4. Depreciation charged on fixed assets.9. Dual Aspect Principle :
According to this principle, every business transaction has two aspects- a debit and a credit of equal amount. In other words, for every debit there is a credit of equal amount in one or more accounts and vice- versa.
The system of recording transaction based on this principle is called as "Double Entry System".
Due to this principle the two sides of Balance Sheet are always equal and the following accounting equation will always hold good at any point of time.
Total Assets = External Liabilities + Capital
Example : Ram started business with cash ϕ 1,00,000. It increase cash in assets
side and capital in liabilities side by ϕ 1,00,000.
Total assets ϕ 1,00,000 = External liabilities + Capital ϕ 1,00,000
ϕ 1,00,000 = ϕ 1,00,0000Double Entry System :
Concept :
According to this system every business transaction affects at least two accounts in opposite directions. e.g. if machinery is purchased for cash, machinery is increased whereas the cash is decreased. The amount of every transaction is written twice, once as a debit and again as a credit. The person or the account receiving a benefit is debited and the person or the account who gives something to the business is credited.
Bases of Accounting :
There are two bases of ascertaining profit or loss, namely (1) Cash Basis, and (2) Accrual Basis.
1. Cash Basis of Accounting :
Under this system of accounting transactions is recorded in the books of accounts on the receipt/ payment of cash. Entry is not recorded when a payment or receipt merely due i.e. outstanding expenses, Accrued income are not treated.
This method is contrary to the matching principle.
2. Accrual Basis of Accounting :
Under this system of acounting, revenue and expenses are recorded when they are recognized i.e.
Income is recorded as income when it is accrued (when transaction take place) irrespective of fact whether cash is received or not. Similarly expenses are recorded when they are incurred or become due and not when the cash is paid for them Under these system outstanding expenses, prepaid expenses, accrued income and income received in advance are indentified.
Under the companies Act 1956, all companies are required to maintain their accounts according to accrual basis of accounting.
Difference between Accrual Basis of Accounting and Cash Basis of Accounting.
Basis Accrual Basis of Accounting Cash Basis of Accounting 1. Recording of transactions Both cash and credit transactions are recorded Only cash transactions are recorded 2. Profit or Loss Corrected profit or loss is ascertained due the complete of record of transaction Correct profit of loss is not ascertained because it records only cash transactions. 3. distinction between capital and revenue item This method makes a distinction between capital and revenue nature item This method does not make a distinction between capital and revenue nature item 4. Legal position This basis is recognized under the companies Act 1956 This basis is not recognized under the companies Act 1956
