Accounting principles are the basic rules that a company follows when reporting financial information. These principles have been developed through common usage and as the basis for the complete suite of accounting standards.
1. Revenue Recognition Principle
The revenue recognition principle gives a company a standard to follow for knowing when revenue is recorded and recognized as an item in the financial statements. Since revenue recognition is one of the areas that is often manipulated and biased, it is very important for a company to know when to record that information. Recording of revenue must meet these criteria:
- There is a transfer of the risks and rewards of ownership.
- The seller loses continuing managerial involvement or control of the goods sold.
- The amount of revenue can be reasonably measured.
- Collection of payment is reasonably assured.
- The costs incurred can be reasonably measured.
The revenue recognition principle, a key feature of accrual-basis accounting, determines that companies acknowledge revenue as it is earned (not when they receive payment). Accurate revenue recognition directly affects the integrity and consistency of a company’s financial reporting, so it is essential to businesses.
2. Matching Principle
The matching principle dictates that companies report expenses at the same time as the revenues the expenses are related to and that revenues and expenses are to match on the income statement.
3. Historical Cost Principle
With the historical cost principle, the value of an asset on the balance sheet should reflect the initial purchase price as opposed to the market value.
4. Full Disclosure Principle
Under the full disclosure principle, a company must include all relevant and necessary information for the understanding of a company’s financial statements in the public company filings.
5. Cost Benefit Principle
The cost-benefit principle states that the benefits of an accounting system that help produce financial reports and statements should always outweigh its associated costs.
6. Consistency Principle
The consistency principle helps to prevent manipulation in accounts by stating that all accounting treatments should be followed consistently throughout the current and future period unless required by law to change.
7. Conservatism Principle
The conservatism principle in accounting is concerned with the reliability of the financial statements of an entity. It says that when there is an uncertain event, accountants should err on the side of caution and moderation.
8. Objectivity Principle
The objectivity principle states that the financial statements of an organization should be based on solid evidence. This helps keep accounting departments of a company from producing financial statements that are planted by their opinions and biases.
9. Economic Entity Principle
The Economic entity principle states that a business owner must maintain separate accounting records and bank accounts for each entity, and not intermix with the assets and liabilities of its owners and business partners.
10. Accrual Principle
The accrual principle states that a company should record accounting transactions in the period in which they actually occur, rather than the period in which the cash flows related to them occur. It is a fundamental requirement of all accounting frameworks.
What Is Accounting Principles?
Accounting principles are common rules or guidelines for accounting financial transactions and for preparing financial statements. They are the foundational guidelines for recording and preparing financial statements. Accounting principles allow accountants to bring uniformity in preparing financial statements globally. These accounting principles are established in the field of accounting and are governed by a series of rules as defined by the Financial Accounting Standards Board (FASB).
These basic accounting principles are often referred to as GAAP which stands for the generally accepted accounting principles.
On the whole, GAAP consists of three parts:
- The basic accounting principles and guidelines
- The rules and standards issued by FASB
- The generally accepted industry practices
These accounting principles help to guarantee consistency in accounting reports and financial statements among all businesses. They help to protect business owners, consumers, and investors from fraud.
What is the Importance of Basic Accounting Principles?
The basic accounting principles hold strict standards that companies and businesses must follow for financial reporting. These standards serve as a function to make sure that companies and organizations can’t mislead information in their financial reporting.
Why Is It Important to Understand Accounting Principles?
It is very important for a company or business owner to know and understand accounting principles to help keep their financial records accurate and organized. Accounting principles are an important part of keeping a business running properly.
What Are Accounting Principles Used For?
Accounting principles are the rules that businesses and companies follow to report their financial information. They can be used as references for stakeholders and other managing entities.
When are Basic Accounting Principles Implemented?
Each basic accounting principle has standards and rules that a company or business must follow when preparing its financial statements. These principles also state when a company should implement such rules and it is important to understand the nuances of each principle before setting up any accounting system.
Who Establishes Basic Accounting Principles?
As mentioned before, the basic accounting principles were established by the Financial Accounting Standards Board (FASB) to help establish foundational guidelines for recording and preparing financial statements.
How Do you Apply Accounting Principles in Your Daily Work?
Many of the basic accounting principles can be applied in a person’s daily work. When we check our finances, manage our bills, or even do something as simple as buying groceries, we are using accounting principles. That is why it is essential to learn more about basic accounting principles even if you are not a business owner or an accountant.
Is the Basic Accounting Principle Beneficial?
Yes, as mentioned before, basic accounting principles set standards for businesses and companies to follow in order to have clean and reliable financial accounting statements. Basic accounting principles can even be applied in daily work when dealing with any type of financial transaction or management.