What are Accounting Principles (Generally Acceptable Accounting Principles)?

Generally Acceptable Accounting Principles are the basic rules, principles, concepts in financial accounting for the preparation and presentation of Financial Statements. The main purpose of Generally Acceptable Accounting Principles is to standardize the accounting practice for preparing and presenting financial statements and to make the financial statements comparable, reliable for users of financial statements. GAAP is Generally Acceptable Accounting Principles which are standards in accounting.

Accounting Principles

What are Accounting Principles?

Accounting Principles are the basic rules, standards, practices in financial accounting for Bookkeeping and Financial reporting. Accounting Principles set the framework for the preparation and presentation of financial statements.

List of the Accounting Principle:

The important Accounting principles are the Historical cost principle, Revenue Recognition principle, Matching principle, consistency principle, Accrual principle, Conservatism principle, cost-benefit principle. Let us discuss in brief the above Accounting principles.

Historical cost principle:

According to the Historical cost, principle Assets are recorded in the balance sheet at historical cost. This means the purchase of goods and services and acquisition of Assets are recorded at the cost at which they were acquired.

Consistency principle:

All the Accounting Policies, Accounting estimates, Fundamental Accounting assumptions must be consistent from a period to another period. There should not be any deviation from an Accounting policy to another policy from one period to another.

Materiality Principle:

All the financial information must be material while disclosing in financial statements. What is material depends on the decisions and judgment affecting users of financial statements. All items and transaction affecting the decisions and judgment of users of financial statements is Material financial information.

Full disclosure principle:

All material items and material transactions should be disclosed fully in financial statements by giving Notes to financial statements. This is to provide complete and material and reliable financial information to users of financial statements.

Cost-benefit principle:

As per this principle, the cost of providing financial information in financial statements should not exceed providing benefit to the users of financial statements.

Conservatism or Prudence principle:

As per this principle, provide for probable future losses and ignore anticipated future profits and incomes in books of accounts. This means ignore all future anticipated incomes and profits and make provisions for probable future losses and record future losses.

Objectivity principle:

All the financial records and financial statements prepared should be free from Bias and remain independent. Financial statements are prepared to depict financial position but not to persuade users of financial information.

Revenue Recognition principle:

Revenues are recorded as and when earned but not collected. This is called the accrual basis of accounting.

Revenues are recorded in books of accounts as and when accrue or generate.

Matching principle:

Expenses are recorded and matched with their corresponding revenues for the period in which they are incurred and earned. All the expenses in the profit and loss statement are matched and recorded with relevant revenues for the relevant period.

Business entity principle:

As per this principle, Business and Owner are treated separately while recording business transactions in books of accounts. This is also called the Economic entity concept.

Going concern principle:

Assets and liabilities and financial transactions are recorded in financial statements on the assumption that the business entity will survive in the future and the business will operate for a long run and will not liquidate.

The relevance of Accounting principles:

Accounting principles are so relevant as they set standards and rules for financial reporting, accounting treatment of financial transactions. This enables companies to compare their financial statements to other companies and judge the performance in terms of profitability.

Conclusion:

Thus, Accounting principles play a crucial role for setting standards and rules while preparing financial statements for all the business entities. Accounting principles enables companies to compare financial condition and financial performance with competitors financial statements.

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