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Unit 2: Principles of Accounting

recorded in accounting. Revenue/sales is considered to be made when title of ownership of Notes
goods passes from the seller to buyer and the buyer become legally liable to pay.
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 while it is transferred at time of final payment. Herewith,
sales are presumed to the extent of installment received.
2. In the case of contract accounts, if the contract is for long period revenue cannot be realized
until the contract is not completed. Here, only a part of total revenue is treated as realized.

Cost Principle

This principle is closely related to the going concern concept. As per this principle every
transaction of the business should be recorded at its historical cost and not at its market price. At
the time of recording of the transactions, their market price is not considered. Sometimes its
market price may be less than or more than its actual cost but its actual cost is recorded in
accounts because of cost principle. Under this principle the historical cost of a transaction becomes
the base cost for the subsequent years. On the basis of this cost, the depreciation is charged on the
assets and the balance is shown in the balance sheet. All the fixed assets and current assets are
recorded at historical cost. Thus, we observe that the balance sheet prepared on the basis of
historical cost does not give us actual results for those applicable of fixed assets and current
assets. Due to the changing in the price level changes, the financial statements become irrelevant
for the users. This led to the inflation accounting to came into existence.

Dual Aspect Principle

This is the basic principle of accounting. As per this principle every financial transaction of the
business has dual effect and recorded at two places. Therefore, it is called double entry system.
On the basis of this principle it is said that every debit must have an equivalent credit and every
credit must have an equivalent debit because every transaction of the business has two aspects.
For instance, if Mr. Aditya Raj started a business for cash 2,00,000 there will be two aspects of
this transaction. In one aspect cash is coming into business while in the other aspect the business
has to pay this amount to Mr. Aditya Raj. Because Mr. Aditya Raj has given the amount to the
business. For this transaction the following journal entry will be passed:
Cash A/c Dr.
To Mr. Aditya Raj
Or
To Capital A/c
This transaction can be expressed in the following equation:
Capital = Assets (Cash)
2,00,000 = 2,00,000
Here cash (assets) is the resource of the business and capital is the claim of the proprietor as
business has to return this amount to the proprietor.
If the business purchases furniture of 20,000 on credit, the above equation will change as
follows:
Capital + Creditors = Cash + Furniture

2,00,000 + 20,000 = 2,00,000 + 20,000
Capital + Liabilities = Assets

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