Accounting principles
/What are Accounting Principles?
Accounting principles are essentially general guidelines to follow when recording and reporting accounting transactions. They provide some structure to the accounting process. Accounting principles are by no means detailed - consider them instead to be general guidelines similar to the Ten Commandments. Within these principles, only one (the cost principle) is being seriously challenged. All of the others have stood the test of time, and will likely continue to be the guiding principles upon which accounting activities will be based in the future. The most common of these principles are noted below.
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Conservatism Principle
The conservatism principle states that you should recognize expenses and liabilities as soon as possible, even if there is some uncertainty about them, whereas you should delay the recognition of revenues and assets until you are certain of them. This tends to yield more conservative reporting of profits and losses.
Consistency Principle
The consistency principle states that, once you follow an accounting principle or method, you should continue to do so in the future. This gives you more consistent reported results.
Cost Principle
The cost principle states that you should only record a transaction at its original acquisition cost. This principle is less relevant as the accounting standards are pushing more in the direction of fair value.
Economic Entity Principle
The economic entity principle states that you should keep separate the transactions of different business entities. This prevents the financial results of multiple entities from becoming entangled.
Full Disclosure Principle
The full disclosure principle states that you should include in the financial statements of an entity all of the information that might affect a reader's understanding of those statements. This has led to the creation of a considerable amount of footnote disclosure that accompanies many financial statements.
Going Concern Principle
The going concern principle is the assumption that an entity will remain in business. This assumption allows you to defer the recognition of some expenses to later periods (such as depreciation), when a business will presumably still be in operation.
Matching Principle
The matching principle states that you should record all expenses related to a revenue-generating transaction at the same time that you recognize the revenue. This is the foundation for the use of accrual accounting.
Materiality Principle
The materiality principle states that you should include all transactions in the financial statements if their omission would otherwise influence the decisions of a person using the financial statements.
Monetary Unit Principle
The monetary unit principle states that you can only record an accounting transaction for something that can be expressed in a currency. Thus, you cannot record the value of your employees, or similar internally-generated intangible assets.
Reliability Principle
The reliability principle states that you should only record those transactions for which you can obtain objective evidence (such as a supplier invoice). If there is no evidence of a transaction, you would have a difficult time proving it to an outside auditor. Sometimes, transactions for which there is insufficient evidence will instead be documented in the footnotes accompanying the financial statements.
Revenue Recognition Principle
The revenue recognition principle states that you should only recognize revenue when you have substantially completed all revenue-generating activities associated with the revenue to be recognized.
Time Period Principle
The time period principle states that you should always record the activities of an entity over a standard time period, such as a month or a year.
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