Accounting principles, Concepts And Conventions

Accounting principles are the rules and guidelines that companies must follow when reporting financial data or information. To understand this, we can talk about the most popular sets of accounting principles, i.e. generally accepted accounting principles (GAAP).

Accounting principles differ from country to country. Since accounting principles differ across the world, investors should take caution when comparing companies from different countries. The issue of differing accounting principles is less of a concern in more mature markets. They are so basic that if any of them is altered, the entire nature of financial accounting would change.

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A number of basic accounting principles have been developed through common usage. They form the basis upon which modern accounting is based. The best-known of these principles are as follows:

CONSERVATISM PRINCIPLE
This is the concept that you should record expenses and liabilities as soon as possible, but to record revenues and assets only when you are sure that they will occur. This introduces a conservative slant to the financial statements that may yield lower reported profits, since revenue and asset recognition may be delayed for some time. Conversely, this principle tends to encourage that accountants should record losses earlier, rather than later. This concept can be taken too far, where a business persistently misstates its results to be worse than is realistically the case.

DUAL ASPECT CONCEPT
This principles states that all transaction must have two aspects: one debit and one credit. In accounting, there must be a giver and receiver of value.

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MATERIALITY PRINCIPLE
In preparation of Accounts, amount of material value must be recorded. This principle states that the accountants should not report certain economic events when the result of doing so are insignificant as to affect the financial statement e.g Depreciation of stapler.

ACCRUAL PRINCIPLE
This is the concept that states that revenue and expenses are recognized and included in the profit and loss account as they are accrued not as they are paid or received. If a payment is made in advance, it must not be treated as an expense and the recipient must be regarded as a debtor until it's right right to receive cash matures

CONSISTENCY PRINCIPLE
This is the concept that, once you adopt an accounting principle or method, you should continue to use it until a demonstrably better principle or method comes along. Not following the consistency principle means that a business could continually jump between different accounting treatments of its transactions that makes its long-term financial results extremely difficult to discern.

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COST PRINCIPLE
The value of assets are shown at the cost of acquisition. The accountant can value assets in terms of the future returns it is expected to generate. The value in the books may not necessary reflect the current value of the assets.

ECONOMIC/ BUSINESS ENTITY PRINCIPLE
This is the concept that the transactions of a business should be kept separate from those of its owners and other businesses. This prevents intermingling of assets and liabilities among multiple entities, which can cause considerable difficulties when the financial statements of a fledgling business are first audited.

FULL DISCLOSURE PRINCIPLE
This is the concept that you should include in or alongside the financial statements of a business all of the information that may impact a reader's understanding of those financial statements. The accounting standards have greatly amplified upon this concept in specifying an enormous number of informational disclosures.

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GOING CONCERN PRINCIPLE
This is the concept that a business will remain in operation for the foreseeable future. This means that you would be justified in deferring the recognition of some expenses, such as depreciation, until later periods. Otherwise, you would have to recognize all expenses at once and not defer any of them.

MATCHING PRINCIPLE
This is the concept that, when you record revenue, you should record all related expenses at the same time. Thus, you charge inventory to the cost of goods sold at the same time that you record revenue from the sale of those inventory items. This is a cornerstone of the accrual basis of accounting. The cash basis of accounting does not use the matching the principle.

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MONETARY UNIT PRINCIPLE
This is the concept that a business should only record transactions that can be stated in terms of a unit of currency. Thus, it is easy enough to record the purchase of a fixed asset, since it was bought for a specific price, whereas the value of the quality control system of a business is not recorded. This concept keeps a business from engaging in an excessive level of estimation in deriving the value of its assets and liabilities.

RELIABILITY PRINCIPLE
This is the concept that only those transactions that can be proven should be recorded. For example, a supplier invoice is solid evidence that an expense has been recorded. This concept is of prime interest to auditors, who are constantly in search of the evidence supporting transactions.

REVENUE RECOGNITION PRINCIPLE/ REALIZATION CONCEPT
This is the concept that you should only recognize revenue when the business has substantially completed the earnings process. So many people have skirted around the fringes of this concept to commit reporting fraud that a variety of standard-setting bodies have developed a massive amount of information about what constitutes proper revenue recognition.

TIME PERIOD PRINCIPLE
This is the concept that a business should report the results of its operations over a standard period of time. This may qualify as the most glaringly obvious of all accounting principles, but is intended to create a standard set of comparable periods, which is useful for trend analysis .