Disclosure, consistency, prudence, materiality, objectivity

Full disclosure: every important fact must be shown in the statements or in the notes under them. You cannot hide a big loan from the owner or the investors. Company statements must follow formats set by law, and SEBI (the stock market regulator) asks listed companies for more.

Consistency: use the same methods year after year, for example the same way of charging depreciation or valuing stock. If this year's profit is lower but you also changed your method, nobody can tell which caused the drop. Consistency makes comparison possible, both with your own past years and with other firms.

Consistency does not forbid every change. A method may be changed if the law requires it, if an accounting standard requires it, or if the new method gives a fairer picture. The change and its effect must then be disclosed.

Conservatism (also called prudence) is a shield against sudden losses: do not count a profit before it happens, but provide for every loss you expect. If a customer seems likely not to pay, set aside a provision for doubtful debts now. Stock is shown at cost or market value, whichever is lower: if goods cost ₹80,000 but would sell for only ₹72,000, they are shown at ₹72,000; if they would sell for more, the extra profit is not counted yet. Taken too far, deliberately showing assets too low hides profits, creating secret reserves.

Materiality: focus on what is big enough to change a user's decision. A small tea stall may record a ₹400 kettle as an asset. A big company treats it, like erasers and pencils, as an expense straight away. Whether something is material depends on the size of the business, not just the amount.

Objectivity: record transactions without personal bias, from proof that others can check, such as cash memos, invoices and receipts. If someone says "we made a sale of ₹2 lakh today", the accountant asks for the bill.