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Unit 3: Principles of Accounting

Revenue Reorganization Concept Notes

It is also called revenue realization principle. As per this principle the revenue is recorded in
accounting when the sales have taken place. If there is expectation that there will be a particular
transaction in future, that is not recorded in accounting. Revenue/sales is considered to be made
when title of ownership of goods passes from the seller to buyer and the buyer become legally
liable to pay.

Example: If R Enterprise is expecting that S ltd will purchase some goods from their
company in future than it can not record it as a sales transaction in the books of accounts. The
transaction will be recorded only when there is actual transfer of goods by R Enterprise to S ltd.

However, this principle has some exemptions which are as follows:
1. In the case of sales made on the basis of hire purchase system where ownership is not
transferred at the time of sales but transferred at the time of final payment. Herewith, sales

are presumed to the extent of installments received.
2. In the case of contract accounts, if the contract is for a long period revenue cannot be
realized until the contract is not completed. Here, only a part of total revenue is treated as
realized.

Full Disclosure Concept

As per this principal, the financial statements should disclose true and fair view so that these may

provide accurate and sufficient information to the users of financial statements (the statements
which includes the financial data for a particular time period). Disclosure principle means to give

all the information relating to the economic activities of the business to the owner, creditors and
investors. Now-a-days this principle is getting more importance as big business organisations
are being run in the form of limited companies. As per Companies Act, 1956, the profit and loss

account and the balance sheet of the company must show true and fair view of the company.
Therefore, companies are showing foot notes for some items as investments, contingent liabilities
etc. along with the balance sheet.
Objectivity Concept

It is also known as objective evidence concept. As per this principle the transactions which are
recorded in accounting must be on the objective and factual basis. There should be a voucher or
documentary evidence behind each entry in the accounting. The entry must be free from personal
bias and based on the rational approach. If the entries are made without evidence, it will lose the

confidence of the several users of the financial statements about their reliability. For the auditing

of the financial statements, there is also a need of objective evidence.
3.2.2 Accounting Conventions

Accounting conventions are bearing the practical considerations in recording the transactions of
the business enterprise in systematic manner.

1. Convention of consistency
2. Convention of conservatism
3. Convention of disclosure
4. Convention of materiality
Let us understand each of them one by one.

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