
Table of Contents
Accounting Principles of Financial Accounting
The main accounting principles are all about general assumptions, concepts, and case studies. These key accounting principles make sure that financial reports and statements truly depict how an organization conducts its business proceedings. Let’s understand the basic accounting concepts that are the basis of accounting:
Accounting Principles with respect to financial accounting
These are some of the basic accounting principles which help in terms of audit, cash flow, accounting information, preparation of financial statements, managerial accounting, accrual accounting, cost principle, fundamental accounting principles, materiality principles, revenue and expenses, assets and liabilities, etc.
The Entity Theory
The entity theory is all about the core concepts of financial accounting. It implies that the financial proceedings of a business must be kept individual from the personal finance proceedings of a business owner and stakeholders. To put it simply, the finances of a business are considered as a unique entity on which accounting principles are applied and it doesn’t depend upon the legal structure of the business.
The Going Concern Concept
This concept implies that a business can continue to initiate its operations for a definite time in the near future until there is any proof regarding their financial debt.
For the going concern concept. The assets are evaluated based on their potential or capacity to generate financial benefits in the near future. Furthermore, the liabilities are also evaluated based on the concept that they will be paid over a specified interval of time. This is important if a business is expected to be liquidated in the near future. Therefore, the financial statements might require additional adjustments to have a change in the situation.
The Cost Concept
The cost theory depicts that the assets of a state must be reported, recorded on their initial purchase cost and not their current market value. This seeks to provide a basis to verify the assessing of transactions.
For instance, if a company acquires a resources for 10k, the amount will be recorded on the financial statements till the asset has been sold, scrapped due to wearing out or disposed of. This concept will be applicable even if the resources value increases over time. So the original amount of the resources will be listed as the buying price.
Revenue Recognition Principle
The revenue recognition principle depicts that a revenue must be displayed in the financial statements. According to this principle, the revenue is only recognized when it is earned and not when the payment is acquired.
A business has to know the revenue when it has perceived the goods or services for significant credibility of receiving payment.
The Matching Principle
According to the matching principle, expenses need to be in accordance with the revenues so they can produce in the same accounting interval. According to the matching principle, financial proceedings precisely depict the relationship between income and expenses.
Conservatism Approach
The conservatism principle says that accountants must be cautious and select the best accounting medium that reduces the risk of exaggerating assets, incomes, and expenses as well. Therefore, in difficult situations, accountants must select ways that reduce the depiction of your financial statements in a false way that is also too good to be true.
The Consistency Principle
According to this principle, when a principle of method of accounting has been chosen by a firm, they must use it on a consistent basis for sustained periods of time unless there is a specific reason to change.
For instance, if a business has selected a method for depreciating assets, it must continue to choose that method for sustained periods unless there is a reason why change is mandatory. For instance, a change in tax laws implies that a business must change its method of depreciation.
Materiality Law
According to this principle, it is permissible to simplify some accounting treatments if their simplifications doesn’t have a significant impact upon the overview of the financial statements. This law explains how some small errors are negligible in terms of the financial health of a company.
For instance, if a company purchases office supplies for $60, this cost shouldn’t be capitalized as it is a smaller amount. In other cases where larger amounts are involved, then this law might not be applicable.Â
Full Disclosure Principle
According to the full disclosure principle, it is mandatory for companies to provide all the important information about their financial proceedings to the public. This financial statement must include all the information about a business, such as its assets, expenses, revenues, liabilities, etc. This provides clearness about your financial reporting to the public. Additionally, it also enables stakeholders like creditors, investors, and analysts to make better data-driven decisions.
Function of Generally Accepted Accounting Principles ( GAAP ) and IFRS
Accounting principles lay the foundation of the two important standards regarding accounting practices pertaining in the entire world. This includes Generally Accepted Principles ( GAAP ) and International Financial Reporting Standards ( IFRS ).
Understanding GAAP
The generally accepted accounting principles ( GAAP ) are some accounting principles, procedures, standards, and rules that are provided and revised by the Financial Accounting Standards Board ( FASB ) and Governmental Accounting Standards Board ( GASB ). These principles exist to ensure accuracy, consistency, and clarity in financial reporting pertaining to various industries in the United States. Public companies can follow the generally Accepted Accounting Principles GAAP.
The aim of GAAP is to make sure that the financial proceedings of a company are complete, consistent and comparable which allows investors to assess and gather the important information from these financial statements. It also allows to contrast the financial information of different companies.
Understanding International Financial Reporting Standards ( IFRS )
International Financial Reporting Standards is an accounting method and regulations for preparing financial statement of companies. These IFRS standards exists to keep things consistent and clear so that financial statements are easily contrasted anywhere in the world.
Currently, IFRS has profiles of 168 jurisdictions which incorporates the European Union as well. The United States incorporates a different way which is GAAP. To avoid audits, these standards are essential.
IFRS provides comprehensive details which a company must follow to organize their records and report their expenses and income as well. These standards were formed to formulate one accounting language that can be understood by auditors, investors, regulators anywhere in the world.
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