Updated July 20, 2023
Definition of Accounting Principles
The accounting principles are a broad set of rules that the business or the companies must adhere to when they are preparing and reporting their financial numbers as well as earnings. These can be termed as guidelines also which the accountants working in the organizations must refer to when working on books of accounts.
The financial accounting standards board lays down a standardized set of guidelines or a broad set of rules that are termed as generally accepted accounting principles. There are prescribed lists of accounting principles. Every publicly listed company in the US has to adhere to generally accepted accounting principles.
The non-public companies although not listed and obligated to share financial numbers have to prepare their financial statements in line with the generally accepted accounting principles as laid down by the financial accounting standards of the US. This ensures that the non-public companies are able to share their standardized financial statements with stakeholders from whom they intend to get business as well as finance for their new projects in the pipeline. At international levels, the international accounting standards board has laid down accounting principles which are termed as international financial reporting standards.
Top 12 Accounting Principles
There are broadly twelve types of accounting principles namely: –
1. Assumption on conservative principles: The principle states that the business should focus on assessing future losses rather than focusing on future gains. Therefore, when there is a scenario of selecting the best available solutions towards line item reporting, it should select the option that is least favorable.
2. Assumption on consistency principle: The principle of consistency states that when the business has decided to choose or select the accounting method to be utilized for making financial reports then the business must continue to consistently apply the same principle in preparing future financial reports.
3. Assumption on principle of cost: The business must use and report assets, liabilities, and the position on equity on the basis of original cost. However, the actual value may modify over the period of time but it would not apply or used for accounting purpose.
4. Assumption on principle of economic entity: The transactions that happen through the course of business and that undertaken by the owner should be kept and maintained separately. The treatment of such transactions should be performed separately.
5. Assumption on the principle of full disclosure: Any sort of information that would have an impact on the shareholders and users of the financial statements must be disclosed either as notes to the financial statements or it should be bought up alongside the financial statement.
6. Assumption on Going concern: This concept states that the business would continue to operate and function for probable future with no probability of imminent liquidation. This helps the business to undertake some expenses that could be deferred to other accounting periods.
7. Assumption on principle of matching: This concept states that each income recorded should be able to match corresponding the recorded related expenses for a given accounting period. As per the principle of accrual accounting, for every credit entry there should be a debit and vice versa.
8. Assumption on the principle of Materiality: The item should be regarded as material item if and only if it impacts and influence reading of the users of the financial statements. This concept places a broad emphasis on all including all important accounting line items to the financial statement by the accountant.
9. Assumption on the principle of monetary Unit: The transactions of the business should always be recorded and expressed in terms of stable and valid currency. For domestic corporations, the financial numbers should be reported in domestic currency. For multinational corporations, the financial numbers should be translated to both domestic and globally accepted currency.
10. Assumption on the principle of reliability: This is generally applied as a broad guideline that all the available financial information is presented in terms of correct accounting figures.
11. Assumption on recognition of revenues or income: This concept states that the business or the going concern should record their incomes or earnings as and when it is recognized in the time period it was earned or in the time period when it was accrued.
12. Assumption on the principle of time period: The business should highlight and report the financial statements on suitable and acceptable time frames. Here the time frames can be defined as accounting period or financial ending. The financial statements therefore can be reported on annual basis or on quarterly basis or on monthly basis.
Why are Accounting Principles Important?
The accounting principles help in terms of improving the accuracy of the financial numbers as reported by the organization. It, therefore, helps in communicating the right financial position of the business with the stakeholders with whom the companies are looking to collaborate and grow their business. They help in the preparation of standardized numbers. Therefore, it could be stated that the accounting principles help in the formulation of a framework which if the business follows helps in the delivery of correct and accurate financial numbers and such a framework was named as generally accepted accounting principles. As a framework, it helps in the governance of accounting at the global level as well. It regulates and revises accounting definitions at periodic intervals. It also allows the accountants to make assumptions that help in the completion of financial reports. In some cases, for non-public companies, lenders insist on financial statements that are prepared using the generally accepted accounting principles.
Additionally, accounting principles lay down a platform to develop accounting procedures and accounting estimates. Once accounting procedures are finalized, they can be automated using proper available technology. Hence to have accounting principles is absolutely critical.
The accounting principles are guidelines which the accountants and the organizations must adhere to while preparing the financial statements. It helps in the improvement of the accuracy of the financial numbers. It prepares the companies towards efficient stakeholder management as there are situations wherein the stakeholders demand financial statements that are prepared in line with the generally accepted accounting principle.
This is a guide to What are Accounting Principles?. Here we discuss an introduction to Accounting Principles with top 12 principles explained in detail. You can also go through our other related articles to learn more –