Professional Knowledge for IBPS PO/SO
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prescribed the proforma and contents of Balance Sheet and Profit and Loss Account to ensure full disclosure of financial information. 6 The Principle of Vertifiable Objective This principle requires that all transactions recorded in the books of accounts must be evidenced and supported by business documents, such as cash memos invoices, vouchers, etc. These supporting documents provide the basis for making entries and for audit. Objectivity principle also requires that the accounting records must be free from the personal bias of the owners and managers.
ACCOUNTING CONVENTIONS OR MODIFYING PRINCIPLES These principle are exceptions to the basic accounting principles stated above. These modifying principles are as under 1. Principle of Materiality This principle is an exception to the principle of full disclosure. According to this principle, items having an insignificant effect or irrelevant to the user need not be disclosed. American Accounting Association defines materiality as, An item should be regarded as material if there is reason to believe that knowledge of it would influence decision of informed investor . Materiality of an item depends on its nature and amount. It should be noted that what is material for one firm may be immaterial for another. For example, the cost of small tools may be material for a small repair workshop but may be immaterial for TELCO. Therefore, the accountant should judge the importance of each transaction or event to determine its materiality. 2. Principle of Consistency This principle states that accounting procedures and methods should remain consistent from one year to another. These should not be changed from year to year as otherwise the net profits of different years will not be comparable. For example, a firm can choose any one of the several methods of depreciation. But the method once chosen should be followed consistently year after year. However, change may be made to adopt improved techniques of accounting, to keep accounting flexible and to ensure better disclosure of financial information. In case a change becomes necessary, the change and its effect should be stated clearly. 3. Principle of Conservatism or Prudence According to this principle record all anticipated losses but ignore all anticipated gains. Conservatism