Accounting Principles: The 12 Rules, With Examples

TL;DR: Accounting principles are the rules that decide when a transaction is recorded, at what value, and how it is shown, so that any two sets of accounts can be read the same way. The core ones are accrual, going concern, consistency, matching, historical cost, prudence (conservatism), materiality, full disclosure, the business entity concept and money measurement. In India they are codified in ICAI's AS 1 and the Ind AS framework; in the US in GAAP; internationally in IFRS.

Accounting principles are the agreed rules and assumptions that businesses follow when recording transactions and preparing financial statements. They answer three questions for every transaction: when to record it (accrual, matching), what amount to use (historical cost, prudence) and how to present it (consistency, materiality, full disclosure). In India, AS 1, Disclosure of Accounting Policies names three fundamental accounting assumptions (going concern, consistency and accrual) and three considerations for choosing policies (prudence, substance over form and materiality). Section 128 of the Companies Act, 2013 makes accrual and double entry mandatory for every company.

What are the basic accounting principles?

The table below lists the twelve principles that appear across textbooks, ICAI material and the top-ranking guides, with a one-line rule and a rupee example for each.

Some lists add dual aspect (every transaction has a debit and a credit, the basis of the golden rules of accounting), objectivity (records backed by evidence such as invoices) and substance over form (record the economic reality, so an asset on a finance lease is shown as the company's asset).

What are the three fundamental accounting assumptions in India?

AS 1 names three fundamental accounting assumptions: going concern, consistency and accrual. If financial statements follow them, nothing needs to be said. If any one is not followed, the fact must be disclosed. This is a stricter rule than for the other principles: a company that prepares accounts on a cash basis, or on a break-up basis because it is closing, has to say so in the notes.

AS 1 also lists three considerations for choosing accounting policies:

1. Prudence: do not anticipate profits; recognise all known liabilities and losses even if the amount is an estimate.
2. Substance over form: account for what the transaction is, not just its legal form.
3. Materiality: disclose all items significant enough to influence a user's decisions.

How do GAAP, IFRS and Ind AS differ?

GAAP, IFRS and Ind AS are three frameworks that turn these principles into detailed standards.

Ind AS became mandatory in two phases: from 1 April 2016 for companies with net worth of ₹500 crore or more, and from 1 April 2017 for all listed companies and those with net worth of ₹250 crore or more. A typical small business in India, whether a private company, an LLP or a proprietorship, follows AS, not Ind AS.

What qualities should financial information have?

The IFRS Conceptual Framework, which Ind AS follows, says useful financial information must have two fundamental qualitative characteristics:

• Relevance: it can change a user's decision, through predictive or confirmatory value. Materiality is part of relevance.
• Faithful representation: it is complete, neutral and free from error.

Four enhancing characteristics make it more useful: comparability, verifiability, timeliness and understandability. The 2018 revision brought back prudence, defined as caution when making judgements under uncertainty, and said it supports neutrality rather than permitting hidden reserves. That is a narrower idea than the old "anticipate no profit, provide for all losses" rule still taught in many Indian textbooks.

How do the principles work together on one transaction?

Take a Jaipur furniture maker that, on 25 March 2026, delivers a ₹2,36,000 order (₹2,00,000 plus 18% GST of ₹36,000) to a hotel on 30 days' credit. The wood cost ₹1,20,000, and the salesperson earns 2% commission.

• Accrual and revenue recognition: ₹2,00,000 revenue is recorded on 25 March, when the hotel took control of the furniture, even though cash arrives in April, 30 days later. The ₹36,000 GST is a liability to the government, not revenue.
• Matching: the ₹1,20,000 wood cost and the ₹4,000 commission (2% of ₹2,00,000) are expenses of FY 2025-26, the same year as the revenue.
• Accounting period: all of this lands in the year ending 31 March 2026, so the profit and loss account for that year shows ₹76,000 profit on the order.
• Prudence: if by year end the hotel has said it will pay only 70% because of a dispute, a provision of ₹70,800 (30% of ₹2,36,000) is made now, not when the dispute ends.
• Business entity: if the owner takes one chair home, it is recorded as drawings at cost, not as a sale.
• Consistency: if the business has always recognised revenue on delivery, it cannot switch to recognising on payment this year to shift profit.
• Full disclosure: the disputed amount is explained in the notes.

Under Ind AS 115 and IFRS 15, revenue recognition follows a five-step model: identify the contract, identify performance obligations, determine the price, allocate the price, recognise revenue when each obligation is satisfied.

Which principles cause the most mistakes in small businesses?

• Cash basis instead of accrual: recording sales when money arrives makes March look poor and April look great. Companies cannot do this under section 128.
• Mixing personal and business spending: breaks the entity concept and distorts profit and tax.
• Expensing assets: writing off a ₹3 lakh laptop fleet in one year instead of charging depreciation over its useful life (3 years for end-user computers under Schedule II of the Companies Act, so about 33% per year on straight line) breaks matching and going concern.
• Stock at selling price: inventory must be at the lower of cost and net realisable value under AS 2 and IAS 2, never at the price you hope to sell it for.
• Changing methods quietly: switching depreciation or stock valuation methods without disclosure breaks consistency.

Accrual-basis books are easier to keep when invoices, bills and payments post to one ledger. The LuckPanda Finance ledger records an invoice as revenue when it is issued and the payment when it arrives.