Principles of Accounting

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  Principles of Accounting


Accounting is defined as the process of recording, summarizing, and reporting financial transactions to provide useful information for business decisions. The principles of accounting are the basis of the preparation and presentation of various reports in financial statements. Herein, an in-depth explanation of the essential principles of accounting will follow: 



1. Accrual Principle

This accounting principle holds that financial transactions are thereby newbie recorded when they take place, not necessarily at the time cash changes hands. Seen differently, it means that revenues are recognized as earned, while on the other hand, expenses are recognized when incurred independent of the exchange of cash. Guess what? It gives a proportionate view of a company's actual financial standing.

2. Consistency Principle

This principle requires companies to account and apply major accounting methods and key accounting principles in a consistent manner from period to period. This provides comparability of the financial statements over different periods and helps in identifying trends or changes.

3. Principle of Conservatism

Under this principle, when accountants have to make decisions amidst uncertainty, the choice of solutions leading to lower profits and reduced valuation of assets must be selected rather than solutions providing higher profits and asset valuations. This means that this principle prevents the financial statement from misstating the actual financial position of a company.

4. Going Concern Principle

This assumption works under the principle that the business is a going concern. It allows the deferrals for the recognition of some expenses and revenues since the business is supposed to continue its operation for the payment and settlement of such expenses incurred by it.

5. Matching Principle

This is the principle that amounts ought to be matched with revenues they help willingly generate. It means recording expenses within the same period as related revenues to provide more sense in the picture of performance.

6. Materiality Principle

This principle holds that all material things should be disclosed in the financial statements. An item is considered to be material if it could influence an economic decision of users made upon the basis of the financial statements.

7. Full Disclosure Principle

Information that has the implication of affecting the users' understanding of information as presented in financial statements is disclosed. This information is in the forms of footnotes and supplementary information, specifically giving explanation to the items on the financial statement.

8. Historical Cost Principle

This principle states that all assets are to be valued based upon original cost of purchase, not at current market value. This gives objective, verifiable data, although it does not reflect an asset's current value.

9. The Revenue Recognition Principle

As many companies run their operations on credit sales, the revenues from such sales need to be duly accounted for at the time they are earned and acknowledged as realizable values, irrespective of when the cash is received. It, therefore, coincides precisely with the Accrual Principle and has taken over its function to quite an extent in contemporary times to ensure that income is accrued in the period it was earned.

10. Economic Entity Principle

This concept represents that a business's financial activities should not be mixed with the owners' or any other businesses' activities. This provides clarity, accuracy, and transparency while preparing its financial reports.s

11. Monetary Unit Principle

This concept assumes that all the business dealings are to be recorded in a currency with stable value. It ignores all the impacts of inflationary pressures or deflationary pressures; it considers that the purchasing power of the currency is constant at all times.

12. Time Period Principle

This is the principle requiring any business to report its results at the end of standard accounting periods, such as on a monthly, quarterly, or annual basis. This allows for evaluation and comparison of financial performance at regular intervals.

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