Ten Crucial Accounting Principles
Accounting principles are general concepts that govern accounting as a field. These concepts are best practices of basic accounting guidelines or principle. They are the basis of a comprehensive and complete set of rules and standards for accounting.
Recognizing the values of these general accounting principles known as GAAP (Generally Accepted Accounting Principles) is a recommended best practice for business people. There are ten principles and standard guidelines upon which these principles are based:
- The EEA Best Practice: EEA (Economic Entity Assumption) is a best practice where it is assumed that the sole proprietor and the business owner are two individual entities.
- Standard Monetary Unit: For the purpose of best practices in accounting the economic activity is measured in a standard currency. This is the U.S dollar.
- Assumption on Time Period: This is an assumption that it is impossible to report business activities for a specific time interval. Even though it is considered a best practice to report activities at all times.
- Principle of Cost: The money spent on purchasing is known as a cost. Therefore, a history of costs of purchases in the financial statement is known as the historical cost.
- Principle on Full Disclosure: When information is important to an investor or a lender, it should only be disclosed as included in the financial statement for best practices.
- Principle on Concerns: Generally, it is assumed that a company will not close down until it completes its targets and objectives. The company is usually expected to continue operating in the future for as long as it can with best practices.
- The Matching Principle: Companies are obligated to use accrual accounting basis as a best practice. This requires revenues to be matched with expenses as a best practice.
- Principle of Revenue Recognition: When accrual basis are used for accounting, then revenue is recognized when an item is sold, or a service is provided. When the money is received is not a requirement, recognizing the revenue is the important best practice.
- Principle of Materiality: Accountants are permitted to violate an accounting principle if the amount of revenue is insignificant or considered immaterial.
- Principle on Conservatism: When there is more than one alternative for reporting available, conservatism guides accountants to choose the alternative that results in a less net income or that reflects as a lesser asset amount. This is a sensitive best practice and making a choice can be tricky.
Advantages of Accounting Principles
These principles or best practices guide accountants and form the basic foundation of accounting. Complicated, legalistic and detailed accounting rules are based on these principles.
These guidelines and principles are used by the Financial Accounting Standards Board (FASB). Therefore, understanding these principles make understanding GAAP easier with best practices.
Disadvantages of Accounting Principles
Their complexity over the years has made compliance with them quite difficult. Although they are an essential and recommended best practice, they are usually considered cumbersome due to their complexity.
Compliance with these best practices is the basis of all financial institutions. Accountants and business owners must enlighten themselves about these principles and include them as a daily best practice. This is the key to success in terms of accounting.
In this section we will discuss: