A number of basic accounting principles have been developed that are the basic building blocks that form the basis for modern accounting or today what we know of as “Generally Accepted Accounting Principles” or GAAP.
Without these core principles and common practices, the reporting of accounting would be inconsistent and unreliable. Additionally, these core principles provide a standardized way to compare financial reports between companies.
Below are some of the core accounting principles
· Accounting Period Principle – A business should report the results of its operations over a standard period of time, typically monthly, quarterly or annually in order to make useful comparisons.
· Accrual Principle – Accounting transactions are recorded in the period when it is earned, rather than when cash was received from the customer. This also holds true for expenses as they are recorded when they were incurred, rather than when they were paid.
· Consistency Principle – Once a business adopts an accounting method or policy, that method or policy should continue to be used in similar situations, unless there are reasonable reasons. Not following this principle means useful comparisons of financial statements over multiple accounting periods cannot be made due to inconsistent data being used
· Cost Principle – A business should record its fixed short and long-term assets at original cost and not fair value at the time of acquisition minus accumulated depreciation.
· Economic Entity Principle – A business is considered a separate entity from its owners and should be kept separate from the business.
· Full Disclosure Principle – All non-standard information or notes are disclosed in the financial statements to allow a reference point.
· Going Concern Principle – Stipulates that a business is expected to continue indefinitely and assets are not intended to be sold immediately or liquidated.
· Matching Principle – When revenue is recorded all related expenses are recorded in the same period in order to provide an accurate picture of the profitability of the business.
· Materiality Principle – Errors or omissions of accounting procedures that which involves immaterial or small amounts may not need attention or correction as they would not alter business decisions.
· Monetary Unit Principle – Business transactions that are recognized as monetary currency are only recorded in a business’s accounting records.
· Reliability Principle – Only those transactions that have supporting documentation like a receipt and are accurate and unbiased should be recorded.
· Revenue Recognition Principle – Revenue is only recognized only when it is earned.
