There are several basic accounting principles that have been formulated with the common usage. These principles form the cornerstone upon which the current accounting is founded. These principles, concepts will help govern how accounting is applied in the world today.
What then are the basic accounting principles? Let’s take a look at some of the best-known of these basic principles of accounting.
Accrual principle
This concept advocates that accounting transactions get recorded for the accounting time period when they actually happened. Instead of in those periods when you have cash flows connected to them. It is essential for the preparation of financial statements which show what really happened within an accounting period.
Thus this won’t get artificially deferred or expedited by the related cash flows. For instance, when you neglected the accrual principle, you will record expenses only if you paid for them. And this can contain a long delay brought by payment terms for the related supplier invoice.
Monetary unit principle
This accounting concept promotes that each business needs to simply record transactions which can be declared in terms of the amount spent on it. Hence, it is simple enough for you to record those purchases made on assets since they were purchased for a particular price.
Conversely, the worth of the business’ quality control system is not recorded. The monetary unit concept helps keep a business from indulging in an extravagant level of estimation for deriving the worth of its liabilities and assets.
Conservatism principle
This idea states that you need to record liabilities and expenses immediately, but record income and assets just when you are certain they will happen. This presents a conservative angle of the financial statements which can yield lower reported earnings. As assets and revenue recognition get delayed for a while.
Conversely, this rule seems to promote the recording of losses sooner than later. Though this idea can at times get pushed too far, in particular where a company continually misstates their results as worse than is the case.
Materiality principle
This accounting concept supports that you need to record the transactions in your accounting records. In particular, when not doing this could have changed the process of making decisions by someone looking through the business’ financial statements.
Even then, this concept can be quite vague and rather hard to quantify. Due to this, this concept has led to a few of the very picayune controllers ending up including even the tiny transactions in their company records.
Consistency principle
In this concept, it promotes that once you pick out an accounting method or principle, you need to continue using it until a provably better method or principle comes along.
By not sticking to the chosen principle or method means that the business will continually keep jumping between various accounting treatments of their accounting transactions.
Thus this will make a company’s long-term financial outcome become very hard to make out. And can make achieving business financial goals rather hard to attain.
Cost principle
The cost principle states that the business needs to only record its liabilities, equity investments, and assets at their first purchase costs.
Does the cost concept offer the accurate worth of business assets and liabilities? The cost principle is, however, becoming less logical since many accounting standards are going towards the route of changing liabilities and assets to their fair values.
Economic entity principle
This concept promotes that the accounting transactions of any business need to be separated from the assets of its owners and those of other businesses.
Why is this important? This helps prevent mixing of liabilities and assets among several entities, that can lead to some considerable difficulties. Particularly, when financial statements of starter businesses are first getting audited.
Going concern principle
This principle states that a business can continue operating for the predictable future.
What does this mean? This implies that you will be justified in putting off the recognition of several expenses, like the depreciation cost, for a later date. Differently, you will need to acknowledge all expenses in one go and not put off any of them.
Matching Principle
The matching concept states that as you record the revenues, you need to record all affiliated expenses concurrently. Thus, since you bill inventory for the costing of goods sold and concurrently that you are recording income from the sale of these inventory items. This principle is a foundation of the accrual footing of accounting.
Does this concept influence all the accounting principles? The cash foundation of accounting doesn’t use the matching principle.
Reliability principle
This accounting concept states that only those accounting transactions which can be evidenced need to be recorded. For instance, supplier invoices are solid evidence which can be recorded as an expense.
Why is the reliability concept important? This idea is of key interest to auditors, as they are perpetually in search of evidence to prove all business transactions.
Full disclosure principle
The full disclosure concept states that you have to include in or together with the business financial statements all of the details that will influence a reader’s perception of the financial statements.
How does this concept apply? The set accounting standards have largely amplified this concept into qualifying a large number of key informational disclosures.
Revenue recognition principle
This concept states that you need to only acknowledge earnings when the company has considerably realised the process of earnings.
Why is this principle important? Many people have worked around the boundaries of this idea to perpetrate reporting fraud which different standard-setting bodies have formulated a large amount of data about what actually makes up proper recognition of revenue.
Time period principle
This accounting concept indicates that a company has to report the outcome of its dealings over an acceptable period. This qualifies as the most prominent of all the basic accounting principles. However, it is meant to build a given set of comparable periods, and this is helpful in trend analysis.
Wrapping up
Several basic accounting principles have been formulated following their regular usage in accounting. These accounting principles are integrated into some of the accounting structures, from which standards of accounting govern the application and reporting of all business transactions.
If you are looking for more accounting articles, here are some:
Debunking the Common Misconception of Studying POA
Best Reasons to Study Principles of Accounts for ‘O’ Levels
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