Modifying Principles of Accounting
To build the accounting information valuable to different interested parties, the fundamental assumptions and concepts conversed before have been customized. If the cost is more than the profit derived, then the principle should be modified. There should be elasticity in adopting a principle and the advantage out of the principle should overweigh the cost of implementing the principle.
These modifying principles are described below;
- Cost-Benefit Principle
According to this principle, the cost of applying an accounting principle should be fewer than profit. This modifying principle states that the expenditure of applying a principle should not be further than the profit derived from it. If the expenditure is further than the profit then that principle should be modified. According to this principle, the cost of applying an accounting principle should be less than benefits
For example, if your business owns material goods, such as real estate or vehicles, those should be planned as the historical costs of the property, not the present reasonable market value of the property.
- Materiality Principle
Non-relevant information is not to be shown in the financial statements. The concept of materiality requires that in accounting we should focus on material facts. The materiality principle necessitates all comparatively appropriate information should be disclosed in the financial statements. Efforts should not be wasted in recording and presenting those facts, which are irrelevant in the purpose of income of the business. Non-relevant information is not to be shown in the financial statements. Inconsequential and irrelevant information are whichever left out or merged with other items. Accountant judges an item on the basis of the implication of the article and therefore records the transaction.
- Consistency Principle
Consentience usually requires that a company use similar accounting principles and reporting practice through time. As per this principle, accounting information should permit comparisons over a period of time as well as with the working of other enterprises. The spire of the consistency principle is to protect the comparability of financial statements. The system, observations, ideas and principles used in accounting should be constantly practical and applied year after year. Comparisons of financial results of the industry among diverse accounting stage can be important and consequential only when reliable practices were followed in determining them. It means that the business should follow the similar accounting policies constantly so that, comparison of accounts becomes rational and meaningful.
For example, an investor wants to estimate the economic performance of a firm in the current year as compared to that in the previous year.
- Conservatism Concept
The concept of conservatism also known as prudence. It provides direction for recording transactions in the book of accounts and is based on the strategy of playing safe. When there’s more than one suitable method to record a transaction, the principle of conservatism instructs the accountant to decide the alternative that’s superlative for the business they’re working with. The perception states that a conscious approach should be followed in ascertaining income so that profits of the entity are not overstated.
- Industry Practice
As there are dissimilar types of industries, each kind of industry has its own individuality and features. There might be regular industries or non-seasonal industries. A business should follow the accounting principles and policies of the industry to which it belongs. Every industry adopts the principles and conjecture of accounting to perform its own activities. Some industries adopt the principles, concepts, and conventions in a customized method. Therefore, the assessment of one firm with another firm is important.
The accounting performs which has for all time prevailed in the industry should be followed by similar types of industries. e.g., Electric supply companies, Insurance companies maintain their accounts in a particular method.