Accounting Principles

Accounting principles are the rules and guidelines that companies, and other bodies must follow when reporting financial data These regulations standardize the terminology and procedures that accountants must employ, making it simpler to analyze financial data. In the corporate environment, fundamental accounting principles apply to revenues, expenses, assets, and liabilities.

Balance sheets, income statements, and cash flow statements are just a few of the records that track and record these factors. Uniform accounting standards ensure that financial reporting, taxation, expense reports are transparent and consistent from one organization to another.

Who/What Governs Basic Accounting Standards?

Generally Accepted Accounting Principles or commonly called GAAP, is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC) and is the default accounting standard used by companies based in the United States. The specifications of GAAP, include definitions of concepts and principles, as well as industry-specific rulesets.

The Financial Accounting Standards Board (FASB) and the Governmental AccountingStandards Board (GASB) collaboratively produced the US GAAP, which is a comprehensive collection of accounting standards for both governmental and nonprofit accounting as well.

10 Generally Accepted Accounting Principles

  1. Principle of Regularity: According to the first principle of regularity, the accountant adhered to the rules and laws governing GAAP as a standard.
  2. Principle of Consistency: The principle of consistency requires accountants to follow the same rules for reporting from one period to the next to maintain financial comparability between them. Any new or amended standards shall be fully disclosed and supported in the footnotes to the financial statements.
  3. Principle of Sincerity: The accountant works to present a truthful and unbiased picture of a company's financial status.
  4. Principle of Permanence of Methods: The procedures employed in financial reporting should be consistent, allowing a comparison of the financial data for the company.
  5. Principle of Non-Compensation: Reporting should be done completely transparently, without regard to debt repayment, and with both positive and negative information.
  6. Principle of Prudence: This refers to streamlining focus on factual, speculative-free depiction of financial facts.
  7. Principle of Continuity: It is important to consider the continuation of the business when assessing assets.
  8. **Principle of Periodicity: **The entries should be spread out throughout the relevant times. For instance, revenue must be recorded at the appropriate fiscal period.
  9. Principle of Materiality: Accountants have a responsibility to adequately disclose all accounting and financial information in financial reports.
  10. Principle of Utmost Good Faith: The norm presumes that all transactions are conducted honestly by all parties.

Why Are Accounting Principles Important?

Accounting principles are crucial because they support the preservation of market confidence. If not for an accounting governance body and rules, investors would be more reluctant to trust the information presented to them by companies because they would have less confidence in its integrity. Without that trust, fewer transactions might occur, which could result in greater transaction costs and a weaker economy.

Key Takeaways

  • To enhance the quality of the financial information that businesses disclose, accounting standards are put in place.
  • The Financial Accounting Standards Board (FASB) in the United States publishes widely accepted accounting principles (GAAP).
  • GAAP must be followed by all American publicly traded corporations, and non-publicly traded firms must do the same.
  • The International Accounting Standards Board (IASB) publishes International Financial Reporting Standards internationally (IFRS).
  • The FASB and the IASB occasionally work in tandem to issue joint standards on severe issues, but there is no intention for the U.S. to switch to IFRS anytime soon.
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