Accounting in the past was mainly used to (1) keep control over property and assets of the business concerned and (2) ascertain and report about the profit or loss and the financial position relating to the various periods.
But now a days accounting is used not only for the above mentioned purposes but also for collecting, analysing and reporting of information to the management and others at the required points of time to facilities rational decision making.
Moreover, the accounts in the past were prepared mainly for the use of proprietor. Today financial statements are required by the proprietors, creditors, potential investors, Government and many others.
The proprietors study the financial statements to know about the profitability of their business. Creditors study them to ascertain the solvency of the business. Perspective investors are interested in them for the ascertainment of the correct earning potential of the business.
Government makes use of these statements for finding out the net contribution that a business can make the economic well-being of the country.
To satisfy the diverse and complex needs of those who use accounting, one needs something more than the clerical procedures, journalising, posting, taking out trial balance and closing the books etc.
The accountant should have `guides to action’ or `principles’ for completing his work of a wide dimensions. The usefulness of accounting will be maximized only if there exist some generally accepted concepts regarding the nature and measurement of liabilities, assets, revenues and expenses.
There must also be some widely supported standards of disclosure and reporting. There will be widespread understanding of and reliance on accounting statements only if they are prepared in conformity with generally accepted accounting principles.
If there is no common agreement on accounting matters then complete chaotic conditions prevail as in that case every businessman and/or every accountant could follow his own definition of revenue and expense.
Definition : The rules conventions of accounting are commonly referred to as `principles’. A universal definition of the `accounting principles’ is difficult to give. However, `accounting principles’ can be defined in the following two ways :
1. Accounting Principle is a “General Truth” or `fundamental belief. This definition implies a scientific bias and therefore, its application in the face of ever changing socio-economics factors which affect the very basis of a business is doubtful.
2. Accounting principle may be defined as a `rule of action or conduct’. This definition finds favour with the American Institute of Certified Public Accountants as it refers to changing character of rules of action or conduct due to the changes in business practices etc. According to AICPA, accounting principle is a general law or rule adopted or processed as a guide to action.
The accounting principles do not prescribe one way of doing things. They recognize that there are a number of ways in which one thing can be done. The accountant has considerable latitude and choice within the generally accepted accounting principles in which to express his own idea as to the best way of recording and reporting is specified account. The practice of recording and reporting may thus differ from company to company.
3. It should be noted that it would be incorrect to suggest that accounting principles are a body of basic laws like those found in natural sciences like Physics and Chemistry.
Accounting principles are man made and hence are more properly associated with such items as concepts, conventions and standards. Accounting principles were not deducted from basic axtoms, not is their validity verifiable by observation and experiment in a laboratory.
Accounting principles are constantly evolving, being influenced by business practices, the needs of statement users, legislation and governmental regulations the opinions and actions of shareholders, labour unions, creditors and management; and the logical reasoning of accountants.
The sum total of all such influences finds its expression first in accounting theory. Some theories are accepted while some others are rejected. Theory becomes an accounting principle only when it is generally accepted.
A distinction between Fundamental Accounting Assumptions and `Accounting policies’ has been made by the International Accounting Standards Committee (1ASC).
Fundamental Accounting assumptions or postulates according to the ISC underlie the preparation of financial statement. They need not be specifically stated on the face of such statements. Their acceptance and use is assumed in the preparation of financial statements.
Disclosure with full reasons, however, must be made in case they are not followed- Accounting policies on the other hand encompass the principles, basis, conventions, rules and procedures adopted by management in preparing and presenting financial statements.
There are, as stated above, many different accounting and applying those which in the circumstances of the enterprise, are best suited to present properly its financial position and the results of its operations.