Accounting principles serve as bases in preparing, presenting and interpreting financial statements. They provide a foundation to prevent misunderstandings between and among the preparers and users of financial statements. The Conceptual Framework of Accounting mentions the underlying assumption of going concern.

Accounting Principles - What are accounting principles?Accounting principles are the general rules and guidelines that companies are required to follow when reporting all accounts and financial data.Maintain and manage your business practices with Debitoor’s platform to help you stay on top of your financial reporting.Whilst there is currently no universally standardised accepted accounting principles, there are various accounting frameworks which set the standard body. The most common accounting principle frameworks used are, and US GAAP. There are both similarities and differences between these three frameworks, where GAAP is more rule-based whilst IFRS is more principle based. Why are accounting principles important?The purpose of having - and following - accounting principles is to be able to communicate economic information in a language that is acceptable and understandable from one business to another. Companies that release their financial information to the public are required to follow these principles in preparation of their statements.Depending on the characteristics of a company or entity, the company law and other regulations determine which accounting principles they are required to apply.

The standard accounting principles are collectively known as Generally Accepted Accounting Principles (GAAP). GAAP provides the framework foundation of accounting standards, concepts, objectives and conventions for companies, serving as a guide of how to prepare and present. Why are generally accepted accounting principles needed?GAAP aims to regulate and standardise practices by providing a framework to ensure companies and organisations are transparent and honest in their financial reporting. Accounting principles serve as a doctrine for accountants theory and procedures, in doing their.Accounting principles ensure that companies follow certain standards of recording how economic events should be recognised, recorded, and presented.

External (for example investors, banks, agencies etc.) rely on these principles to trust that a company is providing accurate and relevant information in their financial statements. Examples of accounting principlesThere are some of the main accounting principles and guidelines, listed under US GAAP:. In situations where there are two acceptable solutions for reporting an item, the accountant should ‘play it safe’ by choose the less favourable outcome. This concept allows accountants to anticipate future losses, rather than future gains.

The consistency principle states that once you decide on an accounting method or principle to use in your business, you need to stick with and follow this method throughout your accounting periods. A business should record their assets, liabilities and equity at the original cost at which they were bought or sold. Construction simulator 2015 pc download free. The real value may change over time (e.g. Depreciation of assets/) but this is not reflected for reporting purposes. The transactions of a business should be kept and treated separately to that of its owners and other businesses. Any important information that may impact the reader’s understanding of a business’s financial statements should be disclosed or included alongside to the statement. The concept that assumes a business will continue to exist and operate in the foreseeable future, and not liquidate.

This allows a business to defer some prepaid expenses (accrued) to future accounting periods, rather than recognise them all at once. The concept that each revenue recorded should be matched and recorded with all the related expenses, at the same time. Specifically in accrual accounting, the matching principle states that for every debit there should be a credit (and vice versa). An item is considered ‘material’ if it would affect or influence the decision of a reasonable individual reading the company's financial statements.

Accounting is referred to as “the language of business” because it communicates the financial condition and performance of a business to interested users.In order to become effective in carrying out the accounting procedure, as well as in communication, there is a widely accepted set of rules, concepts and principles that governs the application of the accounting. These concepts and principles are referred to as the Generally Accepted Accounting Principles or GAAP.In this article, you will learn and familiarize yourself with the accounting principles and concepts relevant in the performance of the accounting procedures. It is a necessity to learn and understand it because you need to apply these concepts and principles during the accounting process. Guidelines on Basic Accounting Principles and ConceptsGAAP, is the framework and guidelines of the accounting profession. Its purpose is to standardise the accounting concepts, principles and procedures.Here are the basic accounting principles and concepts: 1.

Business EntityA business is considered a separate entity from the owner(s) and should be treated separately. Any personal transactions of its owner should not be recorded in the business accounting book unless the owner’s personal transaction involves adding and/or withdrawing resources from the business. Going ConcernIt assumes that an entity will continue to operate indefinitely. In this basis, generally, assets are recorded based on their original cost and not on market value. Assets are assumed to be held and used for an indefinite period of time or during its estimated useful life.

And that assets are not intended to be sold immediately or liquidated. Monetary UnitThe business financial transactions recorded and reported should be in monetary unit, such as US Dollar, Canadian Dollar, Euro, etc.

Thus, any non-financial or non-monetary information that cannot be measured in a monetary unit are not recorded in the accounting books, but instead, a memorandum will be used. Historical CostAll business resources acquired should be valued and recorded based on the actual cash equivalent or original cost of acquisition, not the prevailing market value or future value. Exception to the rule is when the business is in the process of closure and liquidation. MatchingThis principle requires that revenue recorded, in a given accounting period, should have an equivalent expense recorded, in order to show the true profit of the business. Accounting PeriodThis principle entails a business to complete the whole accounting process over a specific operating time period.Accounting period may be monthly, quarterly or annually.

For annual accounting period, it may follow a Calendar or Fiscal Year. ConservatismThis principle states that given two options in the amount of business transactions, the amount recorded should be the lower rather than the higher value. ConsistencyThis principle ensures similar and consistent accounting procedures is used by the business, year after year, unless change is necessary.Consistency allows reliable comparison of the financial information between two accounting periods. MaterialityBusiness transactions that will affect the decision of a user are considered important or material, thus, must be reported properly. This principle states that errors or mistakes in accounting procedures, that which involves immaterial or small amount, may not need attention or correction. ObjectivityThis principle states that the recorded amount should have some form of impartial supporting evidence or documentation. It also states that recording should be performed with independence, that’s free from bias and prejudice.

AccrualThis principle requires that revenue should be recorded in the period it is earned, regardless of the time the cash is received. The same is true for expense. Expense should be recognized and recorded at the time it is incurred, regardless of the time that cash is paid. This is to show the true picture of the business financial performance.