What are accounting Principles?
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Answer Posted / rakesh saha
Financial Accounting is information that must be assembled
and reported objectively. Third-parties who must rely on
such information have a right to be assured that the data
are free from bias and inconsistency, whether deliberate or
not. For this reason, financial accounting relies on certain
standards or guides that are called "Generally Accepted
Accounting Principles" (GAAP).
Principles derive from tradition, such as the concept of
matching. In any report of financial statements (audit,
compilation, review, etc.), the preparer/auditor must
indicate to the reader whether or not the information
contained within the statements complies with GAAP.
• Principle of regularity: Regularity can be defined as
conformity to enforced rules and laws.
• Principle of consistency: This principle states that when
a business has once fixed a method for the accounting
treatment of an item, it will enter all similar items that
follow in exactly the same way.
• Principle of sincerity: According to this principle, the
accounting unit should reflect in good faith the reality of
the company's financial status.
• Principle of the permanence of methods: This principle
aims at allowing the coherence and comparison of the
financial information published by the company.
• Principle of non-compensation: One should show the full
details of the financial information and not seek to
compensate a debt with an asset, a revenue with an expense,
etc. (see convention of conservatism)
• Principle of prudence: This principle aims at showing the
reality "as is": one should not try to make things look
prettier than they are. Typically, a revenue should be
recorded only when it is certain and a provision should be
entered for an expense which is probable.
• Principle of continuity: When stating financial
information, one should assume that the business will not be
interrupted. This principle mitigates the principle of
prudence: assets do not have to be accounted at their
disposable value, but it is accepted that they are at their
historical value (see depreciation and going concern).
• Principle of periodicity: Each accounting entry should be
allocated to a given period, and split accordingly if it
covers several periods. If a client pre-pays a subscription
(or lease, etc.), the given revenue should be split to the
entire time-span and not counted for entirely on the date of
the transaction.
• Principle of Full Disclosure/Materiality: All information
and values pertaining to the financial position of a
business must be disclosed in the records.
• Principle of Utmost Good Faith: All the information
regarding to the firm should be disclosed to the insurer
before the insurance policy is taken.
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