Accounting Principles: – Before knowing this we will know what is accounting, importance of accounting principles and then about accounting principle.
What is Accounting?
Accounting is the process of keeping records of a company’s financial transactions. Journal entries are how accountants condense transactions. In bookkeeping, these entries are used. According to the rules laid down by the auditors and other governing agencies, accountants prepare the books of accounts. Accountants may follow IFRS (International Financial Reporting Standards) or Generally Accepted Accounting Principles (GAAP).
Importance of Accounting Principles
Some of the following points explain the importance of accounting principle: –
- Accounting principles and concepts for financial reporting determine expenses, income, liabilities and assets.
- Companies apply these principles to make it complete while preparing financial statements.
- These properly prepared financial statements help investors analyze useful information. It becomes easier to compare financial information differently.
- These principles increase transparency in the system and red flags can be identified.
- These concepts are supported by both GAAP and IFRS.
What is Accounting Principles?
Accounting principle refer to the guidelines and rules that are followed by companies when reporting their financial information. Through these rules, the expert can standardize the financial information of the company and check the method. This principle ensures that the specificity of the financial information reported by companies is improved. The main objective of accounting principle is to compare multiple financial statement at the same level. For this, it is mandatory that the accounting principles are followed as per the norms.
list of accounting principles
1. Accrual principle
The accrual principle is a concept in accounting that mandates the recording of transactions occurring at the time they occur. This occurs regardless of when the actual cash flows for a transaction are received. Through this principle one can easily get accurate information about the financial condition of any business. Very large scale businesses adopt an accrual method to determine the cash flow from operations. In addition, related expenses and revenues are recorded in a reporting time period. These concepts are supported by both GAAP and IFRS.
2. Consistency principle
When an organization adopts a particular method of accounting of documenting or reporting, it must remain consistent with that method. The purpose of this basic accounting principle is to make financial statements comparable across industries and companies. There are two main issues associated with this theory. The first is that, the principle is not followed properly when there are many persons recording the information and compiling the reports. Organizations need to have a set method internally to deal with this problem. The second is related to switching between financial reporting methods of accounting. Many organizations do this to manipulate this information for their benefit.
3. Conservatism Principle
According to these principles, debtor expenses should be recognized at an early stage when there is uncertainty about the outcome. Theory gives you a realistic plan for unforeseen situations. However, principle assets and revenue are recognized when it is believed to be realised. This principle is applied to identify estimates.
4. Cost Principle
When any business acquires any fixed asset, its initial value is recorded in the financial statements report of the business. This value cannot be corrected to the market value of the currency spread. It has not been updated to reflect any depreciation or appreciation. It is also known as cost theory. Companies keep records of their tangible assets without showing the market value.
5. Economic Entity Principal
It is an accounting concept that requires businesses to be treated as separate legal and financial entities. This means that the recorded activities of the business entity must be kept separate from the recorded activities of the owner and any other entities. These include sole traders, general or limited liability partners.
6. Matching Principle
There is a concept of accounting in this theory that clearly states that any company should record its revenue and expenses together. Expenses and revenues match the statements for a particular period. It is part of the accrual method of accounting that provides a true representation of operations on income statements.
7. Monetary Unity Principle
Business transactions should be recorded only when they can be expressed in terms of currency. Accounting for non-quantifiable entities should be avoided in financial accounts. When any transaction or event takes place, it is first converted into money. It should then be recorded in the financial statements of a business. This ensures that each accounting record is measurable in monetary terms by currencies.
8. Revenue Recognition Principal
It is a part of GAAP that identifies certain circumstances. Revenue is recognized only when a significant accident occurs. This principle uses the accrual method of accounting. Accordingly, revenue is recognized when revenue is received and earned. The straightforward principle is to recognize revenue when a customer makes a payment. Accounting for revenue becomes more difficult when production takes a long time. It is one of the standard principles of accounting in business.