Generally accepted accounting principles

Did you know that contrary to popular belief, accounting principles are quite easy to learn and understand? With this article you’ll find it even more easier to understand what are the principles of accounting and some of the accounting principles thought to be hard to understand. By reading this article you also get to know what the objectives of the basic accounting principles are.

Here are some of the most sought answers. Read on and know the many accounting principles and their meaning. So what is accounting principles? Accounting principles are simply the set out rules that govern the recording and reporting of financial information in the field of accounting.

This phrase “Generally accepted accounting principles” refers to a set of accounting principles. These set of principles were set by the American Institute of certified public accountants (AICPA) in with an aim of ensuring there was honesty in financial practices in the recording and presentation of accounting information in the accounting field. GAAPs (generally accepted accounting principles) are used by accountants as a guide when they are recording and reporting economic information. They aid in regulating accounting information for truthful and reliable accounts.

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To achieve its objectives GAAPs has 4 basic accounting concepts and principles, 3 assumptions and 5 constraints.

Here’s the list of generally accepted accounting principles

The business entity concept states that financial records must be kept separately for every entity away from personal affairs of the owner. This simply means that the owner should not place any personal asset on the accounts of his business. For every financial activity that has been carried out in a financial period one should be recorded being associated with the specific entity.

The principle states that all the financial statements and any information that affects the companies statements, being incomplete transactions, tax disputes, outstanding lawsuits or any other information should be included in the recording and report of business transactions. Some of these items affect the ledger directly and therefore cannot be assumed, they have to be included in the recording of financial transactions.

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Materiality principle states that an accounting principle may be ignored if there is no real effect on the user of the information. This might happen when the generally accounting principle may be very expensive, with no significant effect or difficult to apply and therefore such as rule might end up being ignored. After the rule has been ignored the income of any organization must not be significantly affected such that a reader will be able to note that the financial statements are impaired.

Cost principle is one of the fundamental accounting principles there is. It states that assets should be recorded at a cost and at the time which they were acquired. The value of an asset should not change even if the asset appreciates in value such as land at the time of reporting . This removes the possibility of guesswork while making financial records. The only time such a record concerning appreciation can be recorded is when there is an objective evidence that shows the correct value of the new asset from eh original value of the asset.

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However the record of an appreciated item may only be allowed if the item is assessed by financial experts using reliable evidence.

Matching principle is one of the basic principles of accounting. This principle states that the cost of doing business or an expense brought about by an item that brings about revenue should be recorded at the same period as the revenue that has been earned. This ensures that the results of all operations are fairly made at the right accounting period. Revenue acquired but not recorded in the right time may cause the information be regarded as not correct and unreliable. The revenues should match with the accounting period which they were acquired.

Revenue recognition principle provides that any revenue earned is supposed to be recorded when the service or product delivery is done. This means that when a transaction is made it should be recorded even if the cash or goods were not delivered in time. This principle eliminates the possibility of recording a transaction after receiving money for goods that were delivered long time ago. For example for a wholesaler who sells goods in cash, if he sells his goods to his clients and he is not paid immediately he should not wait for his client to pay him. He can choose to record the transactions as being dept by one of his clients, but such a transaction must be recorded.

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The consistency principle requires that a company should go on with the accounting method it choose right from the beginning. The principle states that in the exact method and procedure that accompany used while treating an item in recording of accounts it is the same way that the company will continue using while treating the same item or similar items in future.

When changing from one method or procedure of accounting or recording their items the company should clearly explain as to why they have decided to do so to the readers of the information. Readers have a right to assume a consistent flow of accounting information from the records that they are provided.

Being consistent is very essential while making comparisons to other accounting periods in the organization and between other organizations. It can be quite hard to trace three performance of a particular item which has been recorded differently in several periods.

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This concept requires that accounting period to be taken after a specific period of time. This specific period of time is known as fiscal period. This periods are the ones that will be used to measure reliably the progress of the business. Each accounting period should be given a period and a split if it is expected or has already covered several accounting periods.

With the same fiscal period its easier to compare the progress of the business just by the look of the previous fiscal years.

The concept states that the financial statement of a business should be recorded with a solid evidence. Accounting should be recorded on the basis of evidence to the value of a transaction that has been done. This simply means accounting records should not be recorded according to feelings or personal opinions, but according to the facts available.

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Conservatism convention has it that when there arises two alternatives of recording an item, the alternative that results to the lowest income should be chosen. The principle helps to minimize overstatement of the income received.

What are the objectives of the Generally accepted accounting principles?

Basic objective of GAAP:

Accounting standards ensure that the financial accounting systems takes place within the conceptual framework of accounting. With the principles accounting records are done on a specific way. This ensures presentations of useful accounts which benefit potential investors, creditors and other readers of the information. Which also helps them to make informed financial decisions and reduces uncertainty while making crucial investment decisions.

This is one of the financial accounting principles that ensures investors and creditors get reliable accounting information. This is made possible by giving correct and accounts that follow a systematic way of recording. By use of the right information investors and creditors and any other users of the information will be able to make the right decisions regarding investments and credit decisions. As an investor you are comfortable in investing in a business whose records are clear and correct.

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Principles of accounting helps in maintaining neutrality in the presentation of financial information of a business. This is essentially important for users who may have a conflicting interest in regard to the accounts.

Consistency as an a principle of accounting helps in ensuring that the accounts are comparable with the previous accounting periods and firms in a similar line. With these comparisons it is much easier to note the weak points and strengths of the businesses. It is therefore a requirement by the principles that the accounting recording system should be consistent with the one the organization choose as the in the beginning.

When timeliness as accounting concept is applied, there is a timely flow of accounting information. When this information is made in time the users are able to make their decisions in time.

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Accounting principles mandates that all accounting records must be verifiable. Some of the information used to verify accounting information include: cash sales, invoices, cheque, receipts etc. All this ensures truthfulness of every transaction recorded on accounts.

Helps users of the information to determine the future cash flows based on the past activities and records.

Source: TUKO.co.ke