- Learn Basic Accounting in Less than 1 Hour!
- Accounting Basics
- What are Accounting Principles
- Accounting Cycle
- Accrual Accounting Basis
- Cash Basis Accounting
- Matching Principle of Accounting
- Conservatism Principle of Accounting
- Cash Accounting
- What are Accounting Policies?
- Accounting Estimates
- Mark to Market Accounting
- Cash Accounting vs Accrual Accounting
- Operating Cycle
- Fiscal Year
- Fiscal Year vs Calendar Year | Top Differences | Examples |
- Financial Reporting
- Financial Statements
- Interim Financial Statements
- Consolidated Financial Statement
- Audited Financial Statements
- Accounting Scandals
- Quality of Earnings
- IFRS vs US GAAP
- IFRS vs Indian GAAP
- Accounting for Fair Value Hedges
- Debit vs Credit in Accounting
- Double Entry Accounting System
- Journal in Accounting
- Ledger in Accounting
- Journal vs Ledger
- What is Trial Balance ? | Examples | Steps | Prepare | Errors
- Reconciliation of Books | Types, Best Practices | Useful Tips
- Petty Cash | Meaning | Template | Accounting | Example
- Debit Note | Debit Notes Accounting & its Top Characteristics
- Credit Note
- Debit Note vs Credit Note | Top 7 Differences (Infographics)
- Balance Sheet
- Balance Sheet
- Accounting Equation
- Assets vs Liabilities | Top 9 Differences (with Infographics)
- Trial Balance vs Balance Sheet | Top 10 Differences You Must Know!
- Balance Sheet vs Consolidated Balance Sheet
- Bank vs Company Balance Sheet
- Commitments and Contingencies
- Management Discussion & Analysis
- Revenue Reserve vs Capital Reserve | Top 7 Differences
- Revenue Reserve
- Capital Reserve
- Capital Receipts vs Revenue Receipts | Top 8 Differences
- Capital Lease vs Operating Lease | Top Differences You Must Know!
- Debt vs Equity Financing | Advantages | Disadvantages | Example
- Internal vs External Financing | Top 7 Differences (Infographics)
- Available for Sale for securities
- Held to Maturity to securities
- Cash and Cash Equivalents | Examples, List & Top Differences
- Cash Equivalents
- Restricted Cash
- 3 Types of Inventory | Raw Material | WIP | Finished Goods
- Current Assets
- FIFO vs LIFO
- First In First Out (FIFO)
- Last in First Out (LIFO)
- LIFO Reserve
- Non-Current Assets
- Accounts Receivables? | Definition, Accounting Examples
- Accounts Receivables Factoring
- Allowance for Doubtful Accounts
- Accrued Revenue
- Liquid Assets
- Quick Assets
- Marketable Securities on the Balance Sheet | Top Examples
- Trading Securities in Balance Sheet
- Prepaid Expenses
- Tangible vs Intangible Assets
- Net Tangible Assets | Calculate Net Tangible Assets Per Share
- Tangible Assets
- Capital Expenditure (Capex)
- Salvage Value
- Residual Value
- Fixed Capital vs Working Capital | Top 8 Differences (Infographics)
- Impariment of Assets
- Negative Goodwill
- Accounts Payable | Days Payable Outstanding | Formula |
- Current Liabilities | List of Current Liabilities on Balance Sheet
- Accrued Liabilities
- Notes Payable
- Revolving Credit Facilities
- Bonds Payable Accounting
- Bad Debt Reserve Allowance
- Deferred Expenses
- Unearned Revenue (Sales)
- Deferred Revenue (Income)
- Current Portion of Long-Term Debt (CPLTD) | Balance Sheet
- Long-Term Debt in Balance Sheet
- Financial Liabilities | Definition, Types, Ratios, Examples
- Long-Term Liabilities
- Accounts Receivable vs Accounts Payable
- Minority Interest
- Accounting for Convertibles
- Accounting for Derivatives
- Financial Lease vs Operating Lease
- Off balance Sheet Financing
- Finance vs Lease
- Shareholders Equity
- Shareholders Equity Statement
- Negative Shareholders Equity
- Par Value of Stock
- Share Capital
- Outstanding Shares (Definition, Formula) | Stocks Outstanding
- Additional Paid-in Capital on Balance Sheet
- Retained Earnings (Formula, Examples) | How to Calculate?
- How to Calculate Net Worth of a Company | Formula | Top Examples
- Owners Equity
- Preferred Shares
- Weighted average Shares average outstanding
- Share Buyback
- Accelerated Share Repurchase
- Restricted Stocks Units (RSUs)
- Contingent Shares
- Stock Splits Share
- Treasury Stock Shares
- Dilutive Securities
- Anti Dilutive Securities
- Stock Dividend
- Cash Dividend
- Preferred Dividends
- Homemade Dividends
- Ex dividend date
- Date of Record of dividends
- Cost of preferred Stock
- Common Stock vs Preferred Stock | Top 8 Differences You Must Know
- Stocks Vs Shares
- Stock Options Vs RSU
- Shareholder Equity vs Net Worth | Top 5 Differences You Must Know!
- Stock vs Option
- Stock vs Mutual Funds
- Income Statement
- Income Statement | Top Examples | Template | Format | Analysis
- Cost of Goods Sold
- Direct Costs
- Indirect Costs
- Non Recurring Items
- EBIT vs EBITDA | Top Differences | Examples | Calculation
- Depreciation – Formula | Types | Most Comprehensive Guide
- EBITDA vs Operating Income
- Straight Line Depreciation Method
- Sum of Year Digits Method of Depreciation
- Declining Balance Method of Depreciation
- Amortization of Intangible Assets
- Unrealized Gains (Losses)
- Non Cash Expense
- Share based compensation
- Restructuring Cost
- Extraordinary Items
- Interest Income
- Double Taxation
- Net Loss
- Net Operating Loss (NOL)
- Tax Shield
- Sundry Expenses
- Interest vs Dividend | Top 9 Differences (with Infographics)
- EBITDA vs Net Income
- EBIT vs Net Income
- EBIT vs Operating Income
- Cost vs Expense
- Accounting Profit vs Economic Profit
- Income Tax vs Payroll Tax
- Tax credits vs Tax deductions
- Gross Income vs Net Income
- Profit vs Revenue
- Revenue vs Earnings
- Revenue vs Income
- Profit vs Income
- Revenue vs Sales
- Capitalization vs Expensing
- Income Statement vs Balance Sheet | Top 5 Differences You Must Know!
- Statement of Comprehensive Income | Items | Colgate Example
- FOB Destination
- Explicit Cost
- Implicit Cost
- Direct cost vs Indirect Cost
- Fixed cost vs Variable cost
- Nopat vs Net Income
- Marginal Costing vs Absorption Costing
- Cash Flow Statement
- Cash flow from Operations | Formula, Calculations & Examples
- Cash Flow from Investing Activities (Formula & Top Examples)
- Cash Flow From Financing Activities | Formula & Calculations
- Cash Flow Analysis
- Fund Flow Statement
- Direct vs Indirect Cash Flow Methods
- Cash flow vs Net Income | Key Differences & Top Examples
- Cash Flow vs Fund Flow | Top 8 Differences (with Infographics)
- Accounting Careers
- Accounting Interview Questions
- Financial Accounting Careers
- Top Accounting Firms
- Big Four Accounting Firms
- Forensic Accounting
- Cost Accounting
- Financial Accounting
- Accounting vs Engineering
- Finance vs Accounting
- Bookkeeping vs Accounting
- Accounting vs Auditing
- Bookkeepers vs Accountants
- Accounting vs Financial Management
- Cost Accounting vs Financial Accounting
- Cost Accounting vs Management Accounting
- Financial Accounting vs Management Accounting
- Public vs Private Accounting
- Accounting vs CPA
- Controller vs Comptroller
- Accounting Firms in Australia
- Accounting Firms in Canada
- Top Accounting Firms in US
- Accounting Books
If you decide to invest in a company, you will look at accounting principles to see whether the company followed the principles.
But if you own a company, you need to do a lot more. You need to report your financial data as per the accounting rules and guidelines.
First, let’s understand what are accounting principles.
What are accounting principles?
As the name suggests, accounting principles are set of rules and guidelines by maintaining which a company should report its financial data. To understand this, we can talk about the most popular sets of accounting principles, i.e. generally accepted accounting principles (GAAP).
If you own a company in the United States and you are public listed company here’s what you need to do to remain in the most important and major stock exchanges –
- First, you need to learn the GAAP through and through.
- And then, you need to adhere to GAAP while reporting your financial statements.
If you don’t take the above steps, then you won’t be allowed to be listed on the major stock exchanges in the US.
Now, let’s go into bit detail about what are accounting principles.
What is GAAP?
Understanding GAAP will help you adhere to the most common set of accounting principles. Let’s understand GAAP briefly –
- GAAP is a set of rules and guidelines that the companies need to follow while reporting its financial statements.
- GAAP is created to ensure that the financial reporting remains transparent and coherent throughout the process. And it also ensures that the financial reporting done in one organization remains consistent with the financial reporting done in another company.
- The fascinating thing about GAAP is it is not similar in all geographic locations. As per the region and the industries, GAAP is implemented and followed upon. In the United States, the Securities and Exchange Commission (SEC) ensures that the financial reporting done by the company is followed as per the generally accepted accounting principles (GAAP).
- The publicly traded companies in the United States must comply with both the SEC and the GAAP. Otherwise, it wouldn’t be possible for them to remain publicly traded.
What is IFRS?
GAAP is not being followed in many countries. That’s why we also need to talk about International Financial Reporting Standards (IFRS). Let’s talk about IFRS briefly as well.
- In the US, GAAP is being followed. In many countries other than the US, IFRS is being followed in the case of financial reporting.
- IFRS helps public companies prepare and report financial statements in all over the world.
- Since similar IFRS are set for the entire world, it becomes easy to implement. And for investors also, the comparison between companies becomes significantly easier.
- The auditors also get a global standard to adhere to whenever they verify the financial statements of companies prepared by following IFRS.
- IFRS is not like GAAP. IFRS doesn’t change as per the region. Rather IFRS has a general guideline for preparing financial statements but IFRS doesn’t have any industry-specific financial reporting.
List of Accounting Principles (Top 6)
Here is the list of basic accounting principles that company follow quite often. Let’s have a look at them –
#1 – Accrual principle:
This is one of the most common accounting principles. It says that 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.
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#2 – Consistency principle:
This is another accounting principle which is commonly followed by all organizations. As per this principle 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 bigger 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 actually sold; and 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 on machinery even before the loss would actually happen. Conservatism principle encourages the accountant to report greater liability amount, lesser asset amount, and also a lesser amount of net profits.
#4 – Going concern principle:
As per the going concern principle, it’s accepted that a company would go on operating for as long as it can in 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 accounting principle:
As per this accounting 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.
This was the guide to Accounting Policies and the list of top accounting policies. Here are the other articles in accounting that you may like –