As per AS-1 issued by the ICAI, the primary considerations in selection of accounting policies of an enterprise should be that the financial statements prepared and presented on the basis of such accounting policies should represent a true and fair view of the state of affairs of the enterprise as at the balance sheet date and of the profit.
For this purpose, the major considerations governing the selection and application of accounting policies, as specifically outlined in AS-1 are as under:
In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.
b. Substance over Form
The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form.
Financial statements should disclose all “material” items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements. 
Source : AS-1 of ICAI
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