Accounting principles are the basic concepts and guidelines that underlie the preparation of financial statements. They provide a framework for recording, classifying, and summarizing financial transactions in a consistent and reliable manner.
In the United States, commercial businesses and NPOs must adhere to the same accounting standards known as generally accepted accounting principles (GAAP).
Specialists can analyze the financial data by establishing these guidelines and standardizing accounting practices. These guidelines improve the caliber of the financial data that businesses disclose.
The Financial Accounting Foundation selects the members of the Financial Accounting Standards Board (FASB), an impartial nonprofit body that sets many of these guidelines.
Chapter 1: Accounting Principles
Who determines Accounting Principles?
Basic Accounting Principles
Setting accounting standards is the responsibility of several organisations. The Financial Accounting Standards Board (FASB) oversees generally accepted accounting principles (GAAP) in the United States (FASB). The International Accounting Standards Board (IASB) creates International Financial Reporting Standards (IFRS) for use in Europe and other regions (IASB).
International Financial Reporting Standards (IFRS)
International Financial Reporting Standards are published by the International Accounting Standards Board (IASB) (IFRS). More than 120 nations, including those in the European Union, utilise these standards (EU).
To ensuring that a business's financial statements are comprehensive, consistent, and comparable is the ultimate purpose of any set of accounting standards. As a result, it is simpler for investors to examine and glean valuable information from the firm's financial statements, such as historical pattern data.
The accrual principle states that revenue and expenses should be recognized in the financial statements in the period in which they are earned or incurred, regardless of when payment is received or made.
The cost principle states that assets should be recorded at their original cost, and not at their current market value.
The matching principle requires that a business recognize expenses in the same period as the related revenue, so as to accurately show the results of its operations.
The conservatism principle requires that a business should report expenses and liabilities as soon as they are probable, and to report revenues and assets only when they are certain.
The economic entity principle states that a business should keep its financial records separate from the records of its owners or other businesses.
The materiality principle states that a business should consider the size and nature of an item when determining whether it is important enough to be disclosed in its financial statements.
The consistency principle requires that a business use the same accounting methods from one period to another, so that financial statements are comparable over time.
The full disclosure principle requires that a business provide all relevant information necessary for understanding its financial statements, including any potential liabilities or risks.
The going concern principle assumes that a business will continue to operate for the foreseeable future, and therefore its assets and liabilities should be recorded on the basis of this assumption
The monetary unit principle states that a business should only record transactions that can be expressed in terms of a stable and common currency.