Accounting principles are the common guidelines and rules related to accounting transactions that are followed to prepare financial statements successfully. These principles are the founding guidelines for preparing and recording financials for proper analysis. These accounting principles are also known as Generally Accepted Accounting Principles or GAAP.
These principles guide accountants in financial analysis and ensure that the quality of financial information a company has is improved as efficiently as possible. Moreover, the rules prepare an accountant to develop error-free and consistent accounting data. It also helps organizational stakeholders to compare the financial data of different companies over the years.
The five basic accounting principles are as follows –
- Accrual principle: Accounting’s accrual principle recognizes income and costs when they are generated or spent, regardless of when cash is exchanged.
- Historic cost principle: The historical cost principle states that assets and liabilities should be recorded at their original purchase price, providing consistency and reliability in financial reporting.
- Matching principle: The matching principle is an accounting concept that dictates that expenses should be recognized in the same period as the revenues they help generate.
- Conservatism principle: The conservatism principle in accounting dictates that potential losses should be recognized as soon as they are identified, while potential gains should only be recognized when they are assured.
- Going concern principle: The going concern principle assumes that a business will continue to operate for the foreseeable future, allowing for the deferral of certain expenses and the proper valuation of assets.