Principle may be defined as a general rule of conduct or performance. The principles of accounting are numerous. Some are related to the methodology, other to organizations accounting and some influence the methodology and the organization of work accounting. Here will be listed some of the most basic principles concerning the methodology in accounting.
Generally Accepted Accounting Principles (GAAP)
GAAP represents some of the standard rules that are usually referred to as accounting standards. They are actually guidelines that accountants have to follow in order to develop financial statements. Officially, there are international standards called IRFS (International Financial Reporting Standards) that all businesses must follow. These rules are not so strict when it comes to local companies, since the country they’re located.
Some of the basic principles will be explained further:
- Economic Entity Assumption – while legal issues require all the transactions to be counted as one entity, in accounting they are divided into business and personal transactions.
- Monetary Unit Assumption – US dollar is the only unit in which transactions can be measured.
- Time Period Assumption – basically, it enables the accountant to break down the long-term tasks into shorter periods.
- Cost Principle – any asset, equity or liability should be listed by its original price in the time of purchase.
- Full Disclosure Principle – this principle requires providing all the necessary information in order to see the true image of a company through its financial papers.
- Going Concern Principle – it represents a belief that the company will remain in business for a certain time period, or, in other words, that there is no worry it will go out of business in the near future.
- Matching Principle – all the expenses need to be documented at the moment of incurring, leaving aside the moment of actual cash transfer.
- Revenue Recognition Principle – the income is being recognized once a critical event happens and its amount can be measured.
- Materiality – the rules can sometimes be ignored if it makes no significant difference in situations when following rules is too expensive or too complicated.
- Consistency – in order to provide consistency, accountants need to use the same methods every time, and elaborate the change if it occurs.
- The Objectivity Principle – when various people look at the accounting records, they should be able to come to the same conclusions. Objective evidence is required in order to document something.