Accounting Principles

Chapter Details

1. Accounting Principles

2. Cost Concept

3. Consistency Concept

4. Monetary Unit Concern

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Chapter 1: Accounting Principles

What are Accounting Principles?

Generally Accepted Accounting Principles

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.

Accrual

Cost

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.

Matching

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.

Economic entity

Conservatism

Materiality

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.

Full disclosure

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.

Consistency

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.

Monetary unit

Going concern

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.

Matching

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.

Reliability

Materiality

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 reliability principle requires that a business's financial information should be accurate, verifiable, and trustworthy, based on reliable data and methods.

Revenue recognition

Monetary unit

The monetary unit principle states that a business should only record transactions that can be expressed in terms of a stable and common currency.

Time period

The revenue recognition principle states that revenue should be recognized in the financial statements when it has been earned and can be reliably measured.

The time period principle states that a business should prepare its financial statements over regular and uniform time intervals, such as months or years, to provide a basis for comparison.

Chapter 2: Cost Concept

What is cost concept?

As we have discussed about accounting principles and 13 basic concepts of accounting in the previous chapter, you must be wondering what are these concepts and how are they applied in real time scenarios.

Let us understand the cost concept in depth.

Cost concept is based on the idea that historical cost is a more objective and stable measure of an asset's value compared to its market value, which can fluctuate over time.

The cost concept in accounting is a principle that determines how assets should be valued and recorded in a company's financial statements. It states that assets should be recorded at the amount of money spent to acquire them, known as their "historical cost." This cost should include all expenses incurred in order to bring the asset to its intended use, such as transportation costs, installation fees, and any necessary modifications.

The cost concept is closely tied to the historical cost principle, which states that assets should be recorded at their original cost in the financial statements and not adjusted for inflation or market value. This principle provides a basis for consistent and comparable financial reporting over time. By valuing assets at their historical cost, companies can accurately track the changes in the value of their assets over time and report these changes in their financial statements.