Accounting

The conventional principles of accounting are the generally accepted rules, concepts and conventions that guide the recording, measuring and reporting of financial transactions. They are called "conventional" because they have been developed and accepted by practice over time rather than by law. The main principles are:

1. Business Entity Principle – The business is treated as a separate entity from its owner. Business transactions are recorded separately from the owner's personal transactions.

2. Money Measurement Principle – Only those transactions which can be expressed in monetary terms are recorded in the books of accounts. Non-monetary events are ignored.

3. Going Concern Principle – It is assumed that the business will continue to operate for the foreseeable future and will not be liquidated in the near future.

4. Cost Principle (Historical Cost) – Assets and liabilities are recorded at their original acquisition cost, not at their current market value.

5. Dual Aspect Principle – Every transaction has two aspects — debit and credit — and for every debit there is an equal credit. This is the basis of the double-entry system.

6. Matching Principle – Revenue of a period is matched with the expenses incurred to earn that revenue, so that correct profit or loss is determined.

7. Revenue Recognition Principle – Revenue is recognised and recorded in the period in which it is earned, not necessarily when cash is received.

8. Full Disclosure Principle – All material and relevant information relating to the financial position and performance must be fully disclosed in the financial statements.

9. Consistency Principle – The same accounting methods and policies should be followed consistently from year to year to allow meaningful comparison.

10. Conservatism (Prudence) Principle – Anticipate no profit but provide for all possible losses. Provisions are made for doubtful debts, depreciation, etc.

11. Materiality Principle – Only those items which are material (significant) need to be recorded and disclosed separately; immaterial items may be ignored or merged.

12. Objectivity Principle – Accounting records must be based on verifiable and objective evidence such as vouchers, invoices and receipts, not on personal bias.

These principles together ensure that accounting records are uniform, reliable and comparable, and that the financial statements present a true and fair view of the business.

Primary objective of financial accounting: The primary objective of financial accounting is to record, classify and summarise business transactions in a systematic manner and to present the financial position and financial performance of an organisation to its stakeholders through standard financial statements — mainly the Statement of Financial Position (Balance Sheet), the Statement of Profit or Loss (Income Statement), and the Cash Flow Statement — prepared in accordance with the applicable financial reporting framework (NFRS/NAS in Nepal).

Benefits to stakeholders:

1. Owners/Shareholders: Know the profitability, financial strength and earning capacity of the business, which helps them assess the return on their investment and decide whether to hold, buy or sell shares.

2. Management: Uses accounting information for planning, controlling, decision-making, budgeting and evaluating the efficiency of operations.

3. Creditors and Lenders (Banks/FIs): Assess the creditworthiness, liquidity and debt-servicing capacity of the entity before granting loans or credit facilities.

4. Government and Regulatory Bodies: Use financial statements to determine tax liability (income tax, VAT), for statistical reporting, and to monitor compliance with laws and regulations.

5. Investors and Potential Investors: Evaluate risk and expected return to make rational investment decisions.

6. Employees and Trade Unions: Assess the profitability and stability of the organisation for wage negotiation, job security and bonus claims.

7. Suppliers and Customers: Judge the ability of the firm to pay its dues on time and to continue supplying goods/services reliably.

8. Public and Researchers: Use published accounts to study the economic performance of business entities and their contribution to society.

Conclusion: Thus, the primary objective of financial accounting is to provide reliable, relevant and comparable financial information, which serves as the basis for informed economic decisions by various stakeholders.