Understanding Accounting Principles

   Accounting principles are the rules and guidelines that companies and other bodies must follow when reporting financial data.These rules make it easier to examine financial data by standardizing the terms and methods that accountants must use. The ultimate goal of any set of accounting principles is to ensure that a company’s financial statements are complete, consistent, and comparable. This makes it easier for investors to analyze and extract useful information from the company’s financial statements, including trend data over a period of time. It also facilitates the comparison of financial information across different companies. Accounting principles also help mitigate accounting fraud by increasing transparency and allowing red flags to be identified.

Generally Accepted Accounting Principles

  In the United States, the Generally Accepted Accounting Principles are largely set by the Financial Accounting Standards Board, a nonprofit organization whose members are chosen by the Financial Accounting Foundation. Although privately-held companies are not required to abide by GAAP, publicly traded companies must file GAAP-compliant financial statements in order to be listed on a stock exchange. Chief officers of publicly traded companies and their independent auditors must certify that the financial statements and related notes were prepared in accordance with GAAP.

Some of the most fundamental accounting principles include the following:

  • Accrual principle
  • Conservatism principle
  • Consistency principle Cost principle
  • Economic entity principle
  • Full disclosure principle
  • Going concern principle
  • Matching principle
  • Materiality principle
  • Monetary principle
  • Reliability principle
  • Revenue recognition principle
  • Time period principle

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