Principles of accounting revolve around rules and guidelines suggested by FASB (Financial Accounting Standards Board) that companies need to follow during account management associated with the reporting of financial data.
These principles are also understood as GAAP, i.e., generally accepted accounting principles.
For accountants to work with the various processes and kinds of accounting with utmost efficiency and proficiency, they must have proper understanding and knowledge. There are generally accredited basic guidelines that every user is expected to follow to work with various accounting niches.
Accountants need to be well accustomed to working according to these guidelines.
These basic guidelines that govern the whole process of accounting are commonly referred to as the “Basic principles and guidelines of accounting.”
These rules and guidelines put forth the necessary groundwork for which the whole process of accounting is based. Various complicated and advanced forms of accounting work are based on these basic principles. Through this article, a few of the basic principles of accounting shall be talked about.
What are the Principles of Accounting?
To put it simply, principles of accounting may be defined as the basic guidelines that every professional accountant is expected to follow while working on various accounting processes.
In the USA, the Financial Accounting Standards Board (FASB) has issues and thereby put forward an accredited set of accounting principles, most commonly referred to as the ‘Generally Accepted Accounting Principles,’ in short GAAP.
Some of the fundamental elements of what amounts to the Principles of Accounting, in general, are as mentioned below:
- Time Period Principle
- Conservatism Principle
- Cost Principle
- Economic Entity Principle
- Revenue Recognition Principle
- Full Disclosure Principle
- Monetary Unit Principle
- Going Concern Principle
- Matching Principle
- Materiality Principle
Let us now have a look upon some of the features of these accounting principles-
Key Features of Accounting Principles
Budding accountants and professional accountants must understand the basic key features of accounting principles. They have listed below:
- To maintain and improve the quality of financial information recorded, various kinds of accounting standards are imposed. It is practically implemented as a crucial step before the required financial information is reported to the company’s head or business.
- For International purposes, the International Accounting Standards Board, also known as the IASB, issues the basic principles or guidelines that every professional accountant working with international or Multinational companies are expected to abide by. These guidelines are commonly referred to as the International Financial Reporting Standards or the IFRS.
- At individual ventures or junctures, the U.S. body of Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) may be found to work together to put forth specific common standards of interest to accountants.
10 Principles of Accounting
To understand and thereby have a firm grip over accounting niches, it is crucial to understand the various accounting principles in the best possible manner. Some of the essential and crucial accounting principles have been discussed below:
1. Economic Entity Principle of Accounting
Every accountant needs to keep separate records of all the business transactions of a given proprietorship from the personal transactions of the business owner or company. Even though both the proprietor and the business owner are deemed a single entity in case of legal issues, for accounting purposes, they are deemed as two separate entities.
Generally, this accounting principle expresses that a business is an entity unto itself and should be treated accordingly. This guideline is additionally some of the time called the “separate entity assumption.”
2. Monetary Unit Principle of Accounting
All economic activities are measured in U.S. dollars. Hence, only those transactions that may be expressed in U.S. dollars are hereby recorded if need be.
These principles of accounting allude that all transactions are being recorded in monetary units. The monetary unit principle of account directs that all budgetary action be recorded in a similar currency like for U.S. organizations, it implies in U.S. dollars.
This principle, in this manner, is the thinking behind why you need to experience the additional push to finish your business accounting for foreign transactions.
3. Time Period Principle of Accounting
According to this accounting principle, it is assumed that various complicated and ongoing activities of an individual business, maybe quickly recorded at short time intervals with ease. It is also essential for accountants to keep in mind that the shorter each time interval is made, the more shall the need for fellow accountants to estimate the relevant period increase.
However, it is quite imperative to say that each time interval is shown as the heading per se of each income statement, statement of the cash flows, etc.
This accounting principle alludes to an association being partitioned into different time-spans for simple accounting. Some of these time-spans incorporate quarterly, monthly, or annual periods.
The time period accounting principle necessitates that a business’ budgetary reports show results over different timeframes with the end goal for them to be important to those looking into their records.
Also, it determines that all fiscal summaries must demonstrate the particular timeframe that they are incorporating in their statements.
4. Cost Principle of Accounting
Looking from the accountant’s perspective, it can be ascertained that ‘Cost’ here invariably refers to the amount of money that has been spent. This spent amount of money may be either in the form of cash or maybe in the form of any suitable equivalent to it.
This cost refers to the amount that was spent when a given item was initially obtained, be it at present or at a particular time in the past. For this very reason, all of the amounts that can be found on the financial statements are referred to as ‘Historical Cost Amounts.’
The cost principle of accounting expects organizations to record and report dependent on procurement costs instead of honest evaluation for most assets and liabilities.
By using this, you will get data that is dependable but not exceptionally applicable. Consequently, there is a pattern to utilize fair values.
5. Full Disclosure Principle of Accounting
This principle pertains to circumstances wherein some information crucial to the needs of an investor or a lender, by way of the financial statements, is disclosed to them. It is done either within the financial statement itself or by footnotes to the financial statement.
In the Full Disclosure Principle, the kinds of info and amount revealed ought to be chosen dependent on trade-off analysis. A primary measure of information costs more to get ready and utilize.
The information uncovered ought to be sufficient to make a judgment while keeping costs sensible.
6. Matching Principle of Accounting
In this principle of accounting, expenses must be matched with incomes as long as it is sensible to do as such. In this, costs are perceived not when the work is executed or when an item is made; instead, it is recognized when the work has been done, or the item has been delivered.
When no connection with income can be set up, the cost might be charged as the expenses to the current time frame. By using this accounting principle, you will find a more prominent assessment of real profitability and execution. It follows accrual basis accounting.
In matching principle, costs ought to be coordinated with incomes, and along these lines, sales and the costs used to create those sales are accounted for in a similar accounting period. Such costs can incorporate wages, certain overhead expenses, deals commissions, and so forth.
7. Revenue Recognition Accounting Principle
This principle of accounting says that organizations should not account for revenues until it is acknowledged or feasible, plus when it is earned. It doesn’t make a difference if money has been paid or received.
This is the quintessence of accrual basis accounting measures.
If an organization or business accepts that they may not get installment for services or products delivered, they might not account-related income.
All in all, in this accounting principle, revenue is accounted for when it is earned, paying little mind to when paying for the item or service is finally received.
8. Accounting Principle of Conservatism
This principle of accounting permits an accountant to utilize their best judgment, specifically in some special circumstances.
So, in the situation, when there’s more than one satisfactory approach to record a transaction, this principle educates to record costs and liabilities as quickly as time permits. Still, you should do this only when actual revenues and gains occur.
With the help of this accounting principle, an accountant will be bound to envision misfortunes in the reports, however not profits, incomes, or revenues; subsequently, they will be more moderate and conservative with the business’ profitability.
9. Going Concern Principle of Accounting
This principle of accounting is likewise alluded to as the “non-death principle,” and it suggests that the business will proceed to exist and function with no characterized end date, which means the business won’t liquidate soon.
Also, its guideline additionally directs that if a bookkeeper or accountant thinks (in light of a business’ financial statements) that they’ll be compelled to liquidate, they should disclose that assessment.
10. Materiality Principle of Accounting
This accounting principle permits an accountant to utilize their best judgment in recording a transaction or analyzing any mistake. This one may become the most critical factor when an accountant is accommodating a lot of accounts or finishing business tax return details.
If during this cycle, the accountant analyzes that the record is off relatively by a negligible margin per the general size of the business, they may consider the inconsistency as insignificant and immaterial.
So, as per this principle of accounting, an accountant needs to utilize their expert judgment to decide whether the amount is unimportant or immaterial.
Final Thoughts about Principles of Accounting!
Accounting is one of the most crucial departments of any company or business.
The success and prosperity of a given company depending on its accounting department’s proper functioning to a large extent. Hence every professional accountant must know the basic accounting principles and guidelines like the back of his hand.
With the help of these principles of accounting, accountants get a better insight into the core pieces of the financial proceedings of business. Business owners who are aware of these accounting principles will also communicate more adeptly with an accountant to hire the best-suited individuals for managing their accounts.
However, laws do not force every business to follow these principles, but if you want to ensure integrity with the financial statements of your business, complying with them will be beneficial.
How important do you consider these principles of accounting in managing accounts?