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Accounting Principles and Accounting Concept
The basic purpose of (GAAP) Generally Accepted Accounting Principles AND Accounting concept is to deliver the financial information to the user in a prescribed, uninformed and standard format. Securities and Exchange Commission of a country bound the organization to adopt the standards for preparing the financial statement. That not only helps the user for taking an economic decision but also helps management in taking corrective measures for minimizing the risk and loss for profit increase.
Every user (Investor, Lender, Shareholders, Directors) make a decision on the basis of provided information in form of Financial Statements. So financial reporting has an important and main source for all. How the accountant of organization prepared books of accounts, No one will know if there are no standards. The user could not investigate in detail which business entity has what standards.
In past, even every country have their own rules and regulation called accounting standards for accounts preparation. But with the globalization of the world, they are supporting international financial reporting standards foundation for adopting international rules and standards.
For a better understanding of basic accounting principles, the main concepts of accounting are mentioned below.
List of Accounting Principles
- Separate Entity
- Going Concern
- Money Measurement
- Accrual Basis
- Dual Aspect
- Fiscal Year
- Full Discloser
- Material Information
Accounting Concepts behind the Each Principles:
Accounting needs all values to be recorded in terms of a single monetary unit. It cannot account for goods like the barter system. Assigning values to goods and items, therefore, becomes a problem since it is subjective. However, accounting has prescribed rules to deal with the same.
A company is said to have an eternal existence. Once it is formed, the only way to end it is by dissolution. It does not die a natural death like humans do. Hence, accountants assume the going concern principle. This principle implies that the firm will continue to do its business as usual until the end of the next accounting period and that there is no information to the contrary.
Principle of Conservatism
Accountants are said to be very conservative by nature. This is displayed in the rules that they have created for their profession. According to this principle, when there is doubt about the number of expected inflows and outflows, the organization must state the lowest possible revenue and the highest possible costs.
The principle of conservatism is closely related to the cost principle. The cost principle indicates that companies should list everything on the financial statements at the cost price, not on the market price. Usually, assets like land and building, gold, etc appreciated. However, the accountants will not allow this appreciation to be reflected in the financial statements of the company until it is realized.
Business is a separate legal entity, only that transaction will be updated in the books of account which are purely made for the purpose of business. Although profit and loss are purely for the owner, his personal transaction are not for part of financial records. When he gives anything it will be recorded as capital and when he withdraws from the business it will be treated as drawings. Purpose only to show the
Accrual Concept: under the accrual concepts all revenue and expenses will be recorded when they are recognized and not when realized. It is the combination of Matching and Realization principle
Matching concept: Purpose of this concept is only making the fair income statement. Means revenue should be recorded after deducting cost or expense incurred for it. Cost of Goods will be fair when all expense added which are related to it, whether paid or not. As expense are made for producing, so the cost of goods will be accurate when shows all expenses recognized for it
All expense are recorded when they are recognized irrespective of when they are paid. A utility bill is an example, December bill will be paid in the month of Jan, not in December. It is recognized in the month of December, so it should be treated in the month of December.
Realization: All revenue will be recorded when it will be earned irrespective of when received. For example, Cash received in advance before delivering the stock or giving the services. That should not be recorded as revenue, only when the job will be done.
Fiscal Year: Accounting period is the duration of business performance in the specific period. All companies should close their accounts on regular basis at the end of the adopted accounting period. It may be from Jan to Dec or July to June.
Dual Concepts: Every Transaction has a dual aspect in books and should be recorded in at least more than one account. If one account is debited then at least one account should also be credited. For example, XYZ company purchase car @ $10000, then Car will be debited and Cash will be credited. Debit and credit will be equal.
Material Information concept is one of the main principles of accounting. All material information should be mention in the financial statements or notes to the financial statement for the user. Material information is that which directly effect in making the economic decision. It should be disclosed.