Accounting principles are the common rules and guidelines that businesses must follow when reporting financial data/ information.
Some of the accounting concepts and principles are as follows:
- Matching principle
- The cost principle
- Rules for recognizing Revenue
- Industry-specific regulations
- Full disclosure principle
- Going concern
- Conservatism and others
As per this principle, an entity should match and record all the expenses that relate to the revenue recorded during a specific financial period. The matching principle states that for every credit there should be a debit and vice versa.
The Cost Principle
This principle requires businesses to record assets at the original cost at which they are bought/ acquired. In addition, the amount will not be adjusted for inflation or improvement in market value.
Rules for Recognizing Revenue
Companies should record income/ revenue in its books when it is recognized. In other words, revenue should be recorded in the period it is accrued and not in the period in which it is received.
A business should record transactions and prepare its financial statements in accordance with the International Financial Reporting Standards as well as the regulations that are specifically applicable to the industry in which it operates.
Full Disclosure Principle
Any information that may impact the understanding and decisions of the users of an entity’s financial statements should be disclosed in the notes to the financial statements.
This concept assumes that an entity will continue to operate in the foreseeable future, and will not liquidate.
This concept requires recording revenues when earned and not when they are received in cash, and recording expenses when incurred and not when they are paid.
An item or transaction is considered to be material if it has the ability to impact/ influence decisions made by the users of the financial statements. This concept states that all the material items and transactions should be included and reported in an entity’s financial statements.
This principle states that once an entity adopts or decides to use an accounting principle or method then it should follow it consistently in future accounting periods.
This principle requires businesses to anticipate future losses rather than future gains. For example, if there are two options available for recording and reporting a transaction then the entity should play safe by choosing the less favorable option.