Accounting principles are a set of rules that set a standard for accountants on how financial data is and should be recorded and reported. Every business uses them to ensure its financial statements are understandable and accurate. This ensures honest, readable, and consistent information across companies in the reports. The phrase accounting principles illustrates that upholding these rules is essential in maintaining a fair and comprehensible financial environment.
Accounting principles are the grammar rules of accounting (and finance). Just as you need grammar to build a proper sentence, an accountant needs accounting rules (like GAAP, more below) to keep their records proper. These rules are universal when it comes to accounting; they apply to businesses both big and small.
They are other called general accepted principles or basic accounting principles. These, when followed collectively by most of the companies in a country, are called generally accepted accounting principles, or GAAP accounting principles. The meaning of accounting principles are simply the rules companies follow to record money-related things accurately. These rules also ensure that every company behaves the same way. It helps people have faith in financial reports.
In this article, you will get all information regarding accounting principles and concepts, from the 3 basic accounting principles to all the 14 principles of accounting in detail. We will also cover also GAAP accounting principles and their working in the real world.
What are Accounting Principles?
The basic rules and guidelines for how to record financial records are called accounting principles. This new set of rules gives instructions for writing about income, expenses, profits and losses. Without them, there would be chaos, and no standard way of capturing business events that actually occurs. These rules help businesses:
- Know when to log income or expenses
- Store records in a proper format
- Avoid mistakes in reporting
- Establish trust with investors, banks and customers
Accounting principles mean truthfulness, clarity, as well as uniformity of accounts. These rules allow people from different companies or countries to understand each other’s financial reports. This is all to make creating comparisons of companies easier, tracking who’s doing well, and to inquire and make more informed decisions.
Some of the major terms that relate to these principles are:
- Basic accounting principles
- General accounting principles
- Generally Accepted Accounting Principles (GAAP)
All companies, large and small, are required to comply with these in order to ensure their books are accurate.
Principles of Accounting
Apart from there are many accounting principles, let us discuss 3 basic accounting principles. These are the fundamental elements of all other rules. These are what every accountant gets taught first.
Accrual Principle
This rule states that income and expenses must be recorded at the time they occur, not when the money is actually received or disbursed.
For instance, if you deliver a service in March but receive the payment in April, you have to input the income in March. This rule provides for recognition of income and expense in the same period. It assists in measuring the actual gain or losing.
Consistency Principle
Once a method is decided, it should be consistently applied over time (like how depreciation will be calculated each year), unless a good reason to change arises, according to this principle. This aids in making year-to-year comparisons of records.
Going Concern Principle
This indicates that a company will operate moving forward. It presumes the business is not shutting down anytime soon. This is useful in making plans and records on long basis.
These 3 fundamental accounting principles are part of the broader general accounting principles. All companies use them. They help ensure that financial data is accurate and reliable.
The 14 Principles of Accounting
There are more rules in addition to the basic principles known as the 14 principles of accounting. These provide further information on recording and presenting financial transactions. Let us reiterate each of those in clear detail:
Accrual Principle
We already talked about this. Use accrual accounting, recording income and expenses when they occur, not when payment is received.
Consistency Principle
Apply the same accounting method every year. Do so only for an appropriate cause.
Going Concern Principle
Assume the company is going to be around for a long time and is not going to go out of business any time soon.
Matching Principle
Costs incurred should correspond with the income they generate, from the same period. So that enables really real profit.
Cost Principle
Only record items at their original cost, not at their present value.
Objectivity Principle
Records must be factual and document based, not opinions.
Revenue Recognition Principle
Recognize income when it is earned, not when cash is received.
Full Disclosure Principle
Any important information would be disclosed in the financial reports. No hiding anything.
Time Period Principle
You can also record all data in fixed blocks of time (monthly, quarterly, yearly).
Conservatism Principle
When in doubt, use the method that yields lower profits. Caution not cocky.
Materiality Principle
Forgive little things that have no bearing on decisions. Focus on important data.
Monetary Unit Principle
If that can be accurately measured in money, only then record it.
Economic Entity Principle
The owner and the business are separate entities. Keep their records separate.
Reliability Principle
Ensure the records can be verified and reliably trusted.
These rules fall under overall accounting principles. When correctly followed, they also assist in decision making and reporting.
What are Generally Accepted Accounting Principles (GAAP)?
It is also referred to as Generally Accepted Accounting Principles or GAAP accounting principles. These rules allow companies to prepare financial statements that are complete, fair and grounded.
GAAP includes all of the basic accounting principles, the 14 principles of accounting, as well as the standards set by accounting boards. These rules ensure that every company takes the same steps to create reports.
In India, it is referred to as Indian Accounting Standards (Ind AS) with a similar set of rules.
What are GAAP Accounting Principles and Why Do They Matter?
GAAP regulations are critical due to the following reasons:
- They simplify financial statements
- They make it easier for people to compare companies
- They reduce the risk of fraud
- They improve investor trust
Companies could run into legal trouble if they don’t use GAAP accounting principles. And, banks and investors could lack confidence in them.
GAAP Relation with Other Accounting Rules
Some of these generally accepted accounting principles include:
- 3 basic accounting principles
- Fundamentals of accounting principles such as the cost or revenue recognition principles
- 14 principles of accounting with everything you need to know
GAAP is essentially the entire set of laws that accountants in a country would comply with.
Importance of Accounting Principles
Good accounting principles keep businesses’ financial data tidy and functional. Let’s see how they help:
Make Financial Data Reliable
When the same rules are applied to all companies, the data is accurate. This makes for easy checking or auditing.
Help with Legal and Tax – Reporting
Governments produce good reports for taxes and regulations. These guidelines assist with this.
Attract Investors and Loans
Banks and investors review financial statements before “writing checks.” Clean reports indicate efficient business management.
Improve Decision-Making
Managers rely on financial reports to determine outlays, personnel and pricing. Good reports assist with smart choices.
Without accounting principles and concepts, business decisions also can be wrong. Moreover, there will be a lack of trust in the financial systems.
How to Learn and Apply Accounting Principles?
A few simple tips can help commerce students or aspiring accountants comprehend accounting principles:
- Begin with the 3 Basic Accounting Principles – These are the simplest of them all to comprehend and implement.
- Try to read the 14 Principles of Accounting one by one – Try to understand each with examples.
- Templates that using GAAP – There are many free templates online that are built on generally accepted accounting principles.
- Learn with Examples – Create your dummy company and do basic reports.
While learning, also memorize terms like general accounting principles, basic accounting principles, GAAP accounting principles, and meaning of accounting principles. They help show you the whole picture.”
Relevance to ACCA Syllabus
These concepts are absolutely covered in ACCA and are best elaborated in Financial Accounting (FA) and Corporate and Business Reporting (SBR). A very intensive and comprehensive course covers these concepts thereby ensuring that students can fairly apply IFRS thereby ensuring compliance with global reporting standards.
Accounting Principles ACCA Questions
Q1. Which accounting concept states that the accounts of the business reflect the business only and not the activities of the owner?
A. Consistency Principle
B. Economic Entity Principle
C. Prudence Principle
D. Full Disclosure Principle
Answer: B. Economic Entity Principle
Q2. Which principle states that revenues must be recognized in the period they are earned, rather than received?
A. Principle of reknowledge
B. Cost Principle
C. Objectivity Principle
D. Monetary Unit Principle
Ans: A Revenue Recognition Principle
Q3. The matching principle is most closely associated with:
A. Recognition of revenue on cash collection
B. To expense in the same period as associated revenue
C. All assets are recorded at fair value
D. Reducing tax payments
Answer : B: Matching expenses to the period in which the related revenue is recognized
Q4. What assumes a company exists in perpetuity until demonstrated otherwise?
A. Going Concern Principle
B. Periodicity Principle
C. Prudence Principle
D. Historical Cost Principle
Answer: A. Going concern
Q5. Which principle dictates that a company must inform whoever is reading that information if its method of deprecation has changed?
A. Consistency Principle
B. Cost Principle
C. Conservatism Principle
D. Time Period Principle
Answer: A. Principle of Consistency
Relevance to CMA Syllabus
Which more in the Part 1 exam on Financial Planning and Performance of the US CMA exam — The accounting principles that guide the organization of financial data, how it is matching and reporting with the aim to determine the use of the data for decision making and internal control.
Accounting Principles US CMA Questions
Q1. So what accounting principle requires that costs be recognized in the same period that those costs helped produce revenues?
A. Prudence Principle
B. Revenue Recognition
C. Matching Principle
D. Time Period Principle
Answer: C. Matching Principle
Q2. Historical Cost Principle – The historical cost principle states that
A. Each year operations assets should be marked to market.
B. You will capitalize the assets for the amount that was paid
C. Have a person in the community hold the assets (at resellable value)
D. Depreciation is optional
Ans: B — The assets need to be recorded at the price taken.
Q3. Principle of Conservatism: The accountants must:
A. Always show higher profits
B. Ignore uncertain losses
C. Utilize all available advantages
D. Accept expected losses and reject expected gains
Ans: D. Acknowledge anticipated losses but not future profits
Q4. So, explanation: Monetary unit principle is the principle that everything is based on the monetary unit.
A. Findings measured in physical units
B. Only measurable financial transactions.
C. Giving only non-financial matters.
D. Currency — non standard currency usage
Ans: B Quantifiable monetary transaction
Q5. In their works, they propose the principle of periodicity, which states:
A. Keep all documents for five years
B. Reports be made monthly
C. Business life will be divided into epochs
D. Periodic and interim financial statements
Answer: (C) Business to be split up into periods
Relevance to CPA Syllabus
For the CPA exam, the FAR (Financial Accounting and Reporting) section tests the rules behind GAAP accounting. So these are the core principles that govern the preparation and presentation of all the financial statements under USGAAP.
Accounting Principles CPA Questions
Q1. What does GAAP stand for?
A. Generally Accepted Accounting Principles
B. Accounting Policies Generally Accepted
C. Generally Accepted Accounting Principles
D. General Analysis of Accounting Policies
Answer: C. Generally Accepted Accounting Principles
Q2. GAAP says that the most fundamental that the information is made available to readers, that information should be clearly marked off.
A. Prudence Principle
B. Revenue Recognition
C. Full Disclosure Principle
D. Materiality Principle
Answer: C. Full Disclosure Principle
Q3. In conjunction with the cost principle, assets are recorded at:
A. Future value
B. Replacement value
C. Historical cost
D. Book value plus inflation
Answer: C. Historical cost
Q4. Under GAAP, which of the following is an assumption?
A. After the business stops, you have a year.
A. Denote Long data: Use LS to estimate long run effects
C. Going Concern
D. Income should be more than the expenses
Answer: C. Going Concern
Q5. It is there that the matching principle serves a purpose:
A. Avoid income tax
B. Income statement without expense
C. Match cash to cash
D. Expenses are matched against related revenues
Ans: D Why cost will match as per revenue incurring – because these are accrued.
Relevance to CFA Syllabus
The importance of Accounting Principles in FRA in CFA Level I & II. Candidates will also need to interpret financial statements prepared according to GAAP and IFRS, and understand how accounting choices affect financial analysis and valuation.
Accounting Principles CFA Questions
Q1. IFRS is in some way different from GAAP in that its IFRS is to the following effect:
An. Allow other inventory system permits
B. Uses a cash basis
C. Fairer valuation in general
D. Ignores long-standing responsibilities
Ans: C) Increases fair value accounting material
Q2. What principle requires that companies not overstate assets or income?
A. Materiality Principle
B. Substance over Form
C. Conservatism Principle
D. Historical Cost Principle
Ans: C The conservatism principle
Q3. How does comparability allow you to compare financial statement of more than one entity or different time periods?
A. Consistency Principle
B. Comparability Principle
C. Cost Principle
D. Relevance Principle
ANSWER: B. Principle of Comparability
Q4. IFRS leans more towards the recognition of transactions on the basis of:
A. Legal form over substance
B. Tax impact
C. Substance over form
D. Owner’s benefit
Ans: C. Substance over form
Q5. Accrual principle makes a great way of:
A. In the case when cash is received at the time of revenue recognition?
B. Waiting for expenses to be paid before recording them
C. Series from revenues and expenses earned/incurred
D. Immediate tax benefits
Answer: (C) Revenue and expenses are recognized when earned/incurred
