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Understanding Right Ways of Understanding Accounting Principles

4 min read

Understanding Accounting PrinciplesWhen you listen about the word accounting, the big ledgers and accounting books come instantly in your mind and just thoughts about long calculations and entries make you exhaust even before you start working. Mostly, students are always afraid of accounting lectures and assignments because form them accounting is more difficult than rocket science. According to a coursework writing service, basically whole accounting depends on ten principles commonly known as generally accepted accounting principles.

The generally accepted accounting principles (GAAP) are divided into three parts: first the fundamental accounting principles which include realization principle, expense principle, matching principle, cost principle, objectivity principle, continuity assumption, separate entity assumption, unit of measure assumption, accrual based accounting. Secondly, the comprehensive guidelines and standards issued by the Federal Accounting Standard Board and APB and third the commonly acknowledged industry practices. For instance, a company follows generally accepted accounting principles for the preparation of its fiscal year financial statement, for trading of public stock it follows it needs to certify its financial statement by auditors. 

If someone fully understands these ten principles then accounting practices become more understandable. It will not be wrong to say that these principles pervade nearly everything related to business accounting. These generally accepted accounting principles are exceptionally useful as they try to regulate and control accounting definitions, rulebooks, and procedures. These principles help businesses to accept that there is constancy from year to year in the procedures used to prepare financial statements. Now let’s have a detailed look at ten basic accounting principles and their explanation. 

According to the first principle, an accountant has to keep the record of all transactions of business separately from the record of transactions of a sole proprietor. Legally, an owner of the business and sole proprietor are considered one person, but from an accounting perspective, sole proprietor and owner are two separate entities. The second rule of accounting states that all the transactions and economic activities should be measured in US dollar. Due to this principle accountants assume that purchasing power of the dollar remains same over the period. According to third principle, the time period for reporting complex and continuing business activities is short. When the reporting interval is short the need for the estimation of amounts will increase. It is compulsory to show the time period in the heading of each statement like cash flow statement, income statement and stockholders equity statement.

The fourth principle is cost principle. Cost mean amount spent i.e. cash or cash equivalent. Due to the cost principle, the mounts of assets are not adjusted with increase in inflation t show any type of increase in value of assets. This means that the assets which company has bought two years ago at $5000 will not reflect the amount of money a company would receive if it were to sell the asset at today's market value. So, the financial statements of a company do not show the current value of a long term asset. The fifth principle is called full disclosure principle. All the important information to investors and lenders are disclosed using financial statements. This information can be stated in financial statement or in the notes to the statement.

The sixth principle of account known as going concern principle makes an assumption that company will continue it operations and services to achieve its objective and will not liquidate in near future. If the financial conditions of a company are predicting that the company will not survive then accountant has to disclose this assessment in financial statements. The seventh principle of accounting states that the expenses of a company should match with the revenues. This principle is called matching principle. The eighth principle of accounting - revenue recognition principle - states that in an accrual base accounting, the revenues of a company are acknowledged instantly when a product or service is sold. The ninth principle is about materiality.

According to this principle, if an amount is insignificant, it might cause an accountant to encroach upon another accounting principle. In such situations, a professional judgement is needed for decision making even if students are pursuing it in their academic career. Usually, the amounts shown in financial statements are rounded to nearest dollar due to the materiality. The tenth principle is about conservatism. According to this principle in a situation where you have two alternatives for reporting an item, due to conservatism or business an accountant may choose that alternative which results in less net income. This principle directs an accountant to forestall or reveal losses, but it does not let a parallel action for additions.