What are the Basic Accounting Principles? Basic Generally Accepted Accounting Principles (GAAP).
Accounting Principles
There are general principles that are used in accounting to govern the accounting process. Accounting principles provide a framework for the accountants on which they make their decisions. Generally Accepted Accounting Principles (GAAP) provides the foundation to accounting professionals about rules and regulations to adapt while creating financial statements. These Accounting principles are explained under.
Economic Entity Concept:
This Accounting principle states that the owner and business are two separate
entities and deals with their own names. The liability of the owner is not the
liability of business and vice versa. For example, the owner purchased a car for
its family usage. This is a liability of the owner itself and he cannot allow recording this transaction in his books of accounts.
Unit of Measurement Concept:
According
to this concept, all the transactions will be recorded in the local currency of a country as a unit of measurement. International trade will be done in
dollars as it is considered as “Inflation Risk-free” unit of measurement.
Full Disclosure:
According to this concept, the Company will disclose all the information about the activities in front of their stakeholders that can affect their decision-making ability. This information will be disclosed in financial statements or the notes attached to them.
Cost Concept:
According to this accounting principle value of an asset will be recorded in books of accounts at original cost and not at current market value. For example, a building is purchased for $1000 in 2000s,
Now the value of the Building is $3000 but the accountant will record the value in
its balance at $1000.
Going Concern Concept:
Going concern concept states that a business will continue its operation
to an unforeseen period of time and cannot be affected by any minor changes in
business. For example, in a partnership business, there are four partners, if
one of them leave the business will continue its operation with a modified
partnership agreement among remaining partners.
Revenue Recognition Concept:
There
are two basis of revenue recognition, one is cash basis and the other is
accrued basis, under the accrued basis of accounting revenues, are recorded as soon
as they are earned and have no connection to the amount receiving. For example, a business report is showing earnings of $1000 but your bank account doesn’t depict
such amount.
Realization Concept:
This accounting principle
states that, revenues earned from business transactions are recorded when a sale is made and earned or service is delivered and earned. For example, a teacher receives its pay after delivering lectures for a month.
Matching Principle:
Matching principles states that the expenses will be recorded in the same accounting period in which revenues are earned., this helps to calculate the correct value of profit a business earned.
Consistency Concept:
This Accounting principle states that once an accounting procedure is
adapted it will be followed for at least one accounting year. If we change the
accounting procedure too often it will bring difficulties to calculate the correct
values of financial statements.
Conservatism Concept:
In
a situation where more than one accounting method is available to record a
transaction. The accountant will go for the least favorable method. This method is used
to not overstate the value of assets or revenue. The conservatism concept allows an accountant to recognize the uncertainty outcomes of expenses, revenues, assets, and liabilities in financial statements. If the accountant doesn’t know the
value of income or asset he will record it at lower possible value. If the
accountant doesn’t know the value of expense and liability he will record it at
higher possible value.
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