The Basic Principles Of Accounting
Accounting Principles are the rules that govern accounting. Accounting principles provide conventions for bookkeeping, financial reporting, and accounting. These principles play a vital role in the preparation of financial statements. Accounting principles are used to ensure that financial information is not misleading, whether it’s for internal or external reporting.
During 1929’s Great Depression, the US Government enacted a law establishing conventions, principles and accounting standards. These principles have been referred to by the acronym GAAP (Generally Accepted Accounting Principles). GAAP standardized the practices that are used by the accounting profession to prepare financial statements. GAAP helps creditors, investors and debtors to analyze and compare the financial performance of companies. These generally accepted accounting practices are required by all companies when preparing financial statements. GAAP covers topics like assets, liability, revenue, expense, equity, financial statement preparation, and industry-specific accounts. There are three principles of accounting.
Accounting has made a distinction between the business and owner. Business Entity Concept implies that the owner and business are separate entities. According to the law, a company is a distinct entity. Legally, a business may exist after its owners. Even the books of account of a company are recorded with the perspective of the entity and not the proprietor.
Going Concern Concept: The concept of a “going concern” explains that a business is perpetual until it is liquidated. The American Institute of Certified Public Accountants describes it as “the ‘going concern’ principle assumes that the company will be in existence for a long time enough to fully utilize all of its assets”. The term “utilized assets” refers to the full potential of their earnings. Going concern is a term used to describe a business that has no intention of ceasing operations or is not required to do so in the near future.
Full Disclosure concept – This concept demands that all accounting aspects be disclosed in financial statements. Using this concept, the financial statements are expected to provide full and accurate information.
Financial statements must be accompanied by footnotes to comply with the Full Disclosure concept. Examples include the market value, methods for valuing investments, inventories, and depreciation methods for fixed assets. As footnotes, they are included in the balance sheet. Full disclosure is meant to inform users of all relevant information and facts regarding the financial results and health.