Accounting Principles

What are Accounting Principles?

Accounting Principles are the rules and guidelines followed by the different entities to record, to prepare and to present the financial statements of the company for presenting true and fair picture of those financial statements.

As the name suggests, these principles are a set of rules and guidelines by maintaining which a company should report its financial data. Here is the list of top 6 basic accounting principles –

  • Accrual Principles
  • Consistency principle
  • Conservatism principle
  • Going concern principle
  • Matching principle
  • Full disclosure principle

List of Top 6 Basic Accounting Principles

Here is the list of basic accounting principles that the company follows quite often. Let’s have a look at them –

Accounting_Principles

#1 – Accrual principle:

It says that the company should record accounting transactions in the same period it happens, not when the cash flow was earned. For example, let’s say that a company has sold products on credit. As per the accrual principle, the sales should be recorded during the period, not when the money would be collected.

Accounting Principles - Revenue 2 PNG

#2 – Consistency principle:

As per this, if a company follows an accounting principle, it should keep following the same principle until a better accounting principle is found out. If the consistency principle is not followed, then the company would jump around here and there, and financial reporting would turn out to be messy. For investors also, it would be difficult to see where the company has been going and how the company is approaching its long term financial growth.

#3 – Conservatism principle:

As per the conservatism principle, accounting faces two alternatives – one, report a more significant amount or two, report a lesser amount. To understand this in detail, let’s take an example. Let’s say that Company A has reported that it has a machinery worth of $60,000 as its cost. Now, as the market changes, the selling value of this machinery comes down to $50,000. Now the accountant has to choose one from two choices – first, ignore the loss the company may incur on selling the machinery before it’s sold; second, to report the loss on machinery immediately. As per the conservatism principle, the accountant should go with the former choice, i.e., to report the loss of machinery even before the loss would happen. Conservatism principle encourages the accountant to report more significant liability amount, lesser asset amount, and also a lower amount of net profits.

#4 – Going concern principle:

As per the going concern principle, a company would go on operating for as long as it can in the near or foreseeable future. By following the going concern principle, a company may defer its depreciation or similar expenses for the next period of time.

#5 – Matching principle:

Matching principle is the basis of the accrual principle we have seen before. As per the matching principle, it’s said that if a company recognizes and records revenue, it should also record all costs and expenses related to it. For example, if a company records its sales or revenues, it should also record the cost of goods sold and also other operating expenses.

#6 – Full disclosure principle:

As per this principle, a company should disclose all financial information to help the readers see the company transparently. Without the full disclosure principle, the investors may misread the financial statements because they may not have all the information available with them to make a sound judgment.

Accounting Principles - Disclosure

Accounting Principles Video

Recommended Readings

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