Accounting Standard – I And Basic Concepts

The basic principles and concepts and modifying principles or conventions hold good and are generally followed by the business entities. However, the Institute of Chartered Accountants of India, in its Accounting Standard I has made a distinction between accounting concepts of fundamental accounting assumptions.

Accounting Standard – I states that following are the Fundamental Accounting Assumptions:

(a)    Going Concern:

The enterprise in normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations.

(b)    Consistency:

It is assumed that accounting policies are consistent from one period to another.

(c)    Accrual:

Revenue and costs are accrued. That are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the period to which they relate. The significance of the fundamental assumptions is that they need not be specifically stated since it is assumed that accountant has followed them while preparing the financial statements. Disclosure is necessary as a note to the financial statements if they have not been followed.

Accounting Standards – I has also made a distinction between fundamental accounting assumptions and accounting policies; thought there is no choice in respect of the former, the business entities have the right to choose a particulars policy e.g., regarding depreciation or valuation of stock. The primary consideration in the selection of Accounting Policies by an enterprise is that the financial statements prepared and presented on the basis of such accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the Balance Sheet date and of the profit or loss for the period ended on the date. The accounting policies selected must be based on the following considerations:

(a)    Prudence: In view of the uncertainty in respect of many business transactions, profits should be recognized when realized though not necessarily in cash. Provision must be made for all known liabilities and looses even though not necessarily in cash. Provision must be made for all known liabilities and losses even though amount cannot be determined with certainty. Prudence requires the making of provision for bed debts, fluctuations in the prices of investments, lowering of the inventory values etc., It does not justify the creation of secret reserves.

(b)    Substance over from: Transactions and over events should be accounted for and presented in accordance with their substance and financial reality and not with their legal from.

(c)    Materiality: Financial statements should disclose all material items which might influence the decisions of the users of the financial statements. It means that there is no conflict between the basic concepts and the fundamental accounting assumptions. Some of the basic concepts are so obvious that financial statements are assumed to be base don them. That may be the reason why Accounting Standards – I has not laid any emphasis on them.

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