Accounting principles

Accounting principles

Accounting principles
Sahil Dahal

Accounting principles are rules that companies follow when they report their financial information. These rules help make financial statements more accurate, reliable, and understandable. Accounting principles are important because they help ensure financial information is presented consistently and transparently.

Accounting principles aim to standardize accounting methods so that financial information can be easily compared across different companies. Using the same rules allows people to compare financial statements more efficiently and make better-informed decisions. These principles are also designed to promote transparency and accountability in financial reporting.

Regulatory Bodies For Setting Principles of Accounting

Regulatory bodies play an essential role in setting the Principles of Accounting, which are rules and guidelines that companies follow when reporting their financial information. These principles ensure financial information is accurate, reliable, and transparent, promoting comparability across different companies. Several regulatory bodies are involved in setting these principles.

One of the most important regulatory bodies for setting the Principles of Accounting is the Financial Accounting Standards Board (FASB). The FASB is a private, non-profit organization that sets accounting standards for public and private companies in the United States. The FASB's standards are Generally Accepted Accounting Principles (GAAP), which companies use to prepare their financial statements.

Another regulatory body involved in setting the Principles of Accounting is the International Accounting Standards Board (IASB). The IASB is an independent organization that sets accounting standards for companies in more than 120 countries worldwide. The IASB's standards are International Financial Reporting Standards (IFRS), and companies in many countries use them to prepare their financial statements.

List of Principles of Accounting

Following are the twelve widely adopted principles in accounting:

Accrual Principle

The accrual principle mandates that transactions should be recorded in the period in which they occur, regardless of when actual cash flows for the transactions are received. This principle allows for an accurate insight into the financial status of a business. IFRS and GAAP support this concept, and businesses with more than $5 million in revenue must adopt this system for taxation purposes.

Consistency Principle

The consistency principle states that an organization should stay consistent when it adopts a specific accounting method. This ensures that financial statements are comparable across industries and companies. However, this principle can be challenging when multiple people record data and compile reports. To combat this issue, organizations should have a set method internally.

Conservatism Principle

The conservatism principle requires businesses to recognize expenses and liabilities at the early stages, even if there is uncertainty about the outcome. However, the principle recognizes revenues and assets only when there is assurance that they are received. This principle is also applied to identifying estimates and is the foundation of the lower cost or market rule, which records inventory at a lower end of its current market value or acquisition cost.

Cost Principle

The cost principle mandates that when a business acquires an asset, its initial value is recorded in its financial reports, regardless of any changes in the market value due to inflation or appreciation/depreciation. This principle allows companies to assess the actual cost of using financial services for calculating the historical cost principles of the company's assets.

Economic Entity Principle

The economic entity principle requires businesses to be treated as a separate financial and legal entities, separate from the activities of the owner and other entities. This principle applies to all types of businesses, including sole traders, limited liability partnerships, and general partnerships.

Matching Principle

The matching principle is an accounting concept that requires companies to report their expenses and revenues simultaneously on their income statements for a specific period. Investors can use this principle to better understand a company's finances by matching revenue and expenses. This is important because it accurately represents the company's operations. However, assessing the cash flow statement is also important to get a complete picture.

Materiality Principle

The materiality principle states that any item impacting an investor's decision-making process should be recorded in the financial statements, Generally using Accepted Accounting Principles (GAAP). This is important when deciding whether to record a transaction during the closing process. This principle also ignores the accounting standard if the result is negligible.

Full Disclosure Principle

The disclosure principle requires companies to include all relevant information in their financial statements. This is necessary because it can affect how readers understand the statement. Companies are only required to disclose information about events that have a material impact on their financial position. They must also report existing accounting policies and any changes to them.

Going Concern Principle

According to the going concern principle, a company will continue to operate indefinitely until there is evidence to the contrary. This ensures that the company can continue to make money and avoid bankruptcy. If a company is no longer a going concern, it must report specific information on its financial statements.

Monetary Unit Principle

The monetary unit principle requires that business transactions are recorded only when they can be expressed in currency. Non-quantifiable entities should not be recorded in financial accounts. Every accounting record must be measurable in monetary terms.

Reliability Principle

The reliability principle ensures that every transaction, business activity, event, etc., is reliable when presented in the financial statement. This principle ensures that financial statements are accurate and transparent. Information should be associated with objective evidence and can be checked, reviewed, and verified.

Time Period Principle

IFRS builds principles to address the evolving financial condition in the world. GAAP and IFRS develop accounting principles based on accounting concepts. US-based companies follow GAAP principles, while most countries outside the US follow IFRS guidelines.

Revenue Recognition Principle

The revenue recognition principle is a part of GAAP that identifies certain conditions in which revenue is recognized. Revenue is recognized when a critical event has occurred, such as when it is realized and earned. This principle uses the accrual accounting method, an important standard accounting principle in the industry.

Importance of Principles of Accounting

The significance of accounting principles can be understood through the following points.

Determination of Income, Expenses, Assets and Liabilities: Accounting principles and concepts provide a framework for determining income, expenses, assets, and liabilities in financial reporting. These principles help companies record their financial transactions accurately and consistently, which is crucial for preparing financial statements.

Consistency in Financial Statements: Companies implement these principles while preparing financial statements to ensure consistency and completeness. Following these principles results in standardized financial information that can be easily compared over time, making it easier for investors to track a company's performance.

Analysis of Useful Information: Properly formulated financial statements are a valuable source of information for investors. These statements provide a clear and concise picture of a company's financial health, allowing investors to analyze the company's performance and make informed decisions.

Comparison of Financial Information: Accounting principles help in comparing financial information meaningfully. By following consistent accounting principles, companies can create financial statements that are easily comparable with previous years' financial statements, making it easier to analyze economic trends and make informed decisions.

Increased Transparency: Accounting principles help increase transparency in the financial reporting system. By following these principles, companies provide a clear and complete picture of their financial position and performance. This transparency helps investors identify potential red flags, such as inconsistencies or unusual transactions, that could indicate financial irregularities.

Related Posts :

blog

Advantages and Disadvantages of using Education Agents

An education agent is a person, agency, or business that provides students who are interested in studying abroad with educational support and placement services. An education agent advises students an
Sandeep NepalWed Apr 19 2023
blog

IELTS for further studies: Everything you need to know

IELTS is the most basic requirement of countless universities and colleges in Australia, the UK, Canada, the USA and many more. If you want to move to an English-speaking country to study, then you sh
Binay PoudelFri Apr 21 2023