When a company or an organization gets established, at that time there are so many general rules and regulations have been made to govern that company or organization. Just like in the field of accounting, there are so many rules and regulations that are made by either any company management team or made by the ruling Government. These general rules are known as Basic Accounting Principles and Guidelines which are more detailed, complicated, and legalistic sub-accounting rules.
In the United States, there is a dedicated organization for making these standardized sets of accounting rules that are known as the Financial Accounting Standards Board (FASB). The FASB issues a standardized set of accounting principles that are known as Generally Accepted Accounting Principles (GAAP) for local trades and other Organizations that as the International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS) to trade Internationally. Sometimes in the United States, FASB and IASB work together on some joint hot topics. In the United States, all companies must have to follow these standardized rules and guidelines at the time of reporting financial data.
List of Basic Accounting Principles
Here are some basic accounting principles that we are going to discuss these are very essential things to understand:
- Principle of Economic Entity: According to the principle of an economic entity, every accountant can manage all financial statements of the business very effectively. It defines all the liabilities of the owner related to his business. According to it, an accountant can maintain all financial records and different bank accounts of an owner and his business, respectively. For legal purposes, a sole proprietor and an owner of any business are considered to be one entity, but in the field of accounting, they are considered to be two separate persons. The principle of economic entity differentiates the personal life and professional life, based on small or large scale business.
- Principle of Monetary Unit: This accounting principle states that All the economic activities should be performed in U.S. dollars and all the transactions that are in U.S. dollars being recorded. Because if all transactions are in the same currency then it is easy to maintain all monetary records and internationally it makes that currency more powerful in the accounting it increases the purchasing power of the currency. Doing this ignores the effect of inflation on recorded amounts that is the balance cash flow of currency in the market.
- Principle of Time Period: In the world of Accounting, Time period is one of the most affecting factors because all accounting activities directly depend on a specific time period. According to this principle, all businesses should report their financial statements that may be either income statements or sales statements, or balance sheets appropriate to a specific time period.
It also states the financial year concept that is every organization has to report their all financial statements of 1 Oct. to 30 Sept. before the end of the year.
- The Revenue Principle: The Revenue principle does not define the total amount of money or revenue of any organization it defines that when any product has been sold or a service has been performed except when a transaction has been completed or when money is received. Under this principle, any organization could earn and report $20,000 of total revenue in its first month of working but receive $0 in a cash form in that month.
- Cost Principle: The term cost can define its meaning itself, that is the amount which can be spent it can be in the form of cash or equivalent of the cash. According to the cost principle, every company or any organization should have to record their actual assets, liabilities, and all equities at the original market value, as they can sell their all assets, liabilities, and equities or they can buy all these. The Market value of all these things may increase or decrease after some time. Because the actual market price of all these things directly affects monetization and it may be the cause of inflation, which is harmful to every market.
- Accrual Principle: According to this principle, all the accounting transactions (Online transactions, cash, cheque..etc) should be recorded in the accounting period when these are actually performed. It is the actual meaning of accrual accounting. This principle is also important for the construction of financial statements by which we can know the reality of all transactions that are performed in an accounting time period.
- Matching Principle: All companies use this accounting principle that is basically based on accrual basis accounting, the matching principle states for that type of accounting in which we maintain all sales and purchase activities for further use that is all expenses should be matched with revenue. For example, all sales commission expenses should be reported in the period when the sales were made.
- Consistency Principle: The consistency principle refers to that activity in which if you once adopt any accounting method you will stay with that method until it is not replaced by any other better method or update. If you have left that method or principle you may see that your all transactions and all accounting activities mesh between two methods that may be harmful to you and your business.
- Full Disclosure Principle: According to the full disclosure principle, every company should disclose all information that is important for an investor or a lender. This information should be disclosed in the form of statements or in the note to the statements either it should be footnotes or numbers of pages. Because it may be required for further use that may be legal use.
- Reliability Principle: This principle states for the reliability of a company or an organization that all transaction activities should be recorded. Invoice is the best example of this because it is the proof of the transaction that is done by the company or user.
Since every end of the day, we can easily find a few changes in accounting rules, it becomes too difficult to understand it. Now with the help of all the above facts, everyone can easily understand the basic principles of accounting.