Principles of Financial accounting deals with the different kinds of financial accounting principles that are required to be followed by the organisations when they are operating in the current business environment. The principles of financial accounting can be described as the specific rules and regulations that are required to be followed by the organisations while reporting the financial data. The U.S. principles and procedures of accounting are referred to as Generally Accepted Accounting Principles (GAAP). These principles define the overall structure of the organisation and ensure that the rights of the different stakeholders like investors, employees etc. are not hampered and proper disclosure regarding the financial information is made with the help of the principles. A brief description regarding the different kinds of financial accounting principles is as follows:
Economic entity principle: According to this principle, the business transactions of a specific entity should be kept separated from the owner and the other kinds of business. This helps in preventing mixing of assets and liabilities between various businesses which are run by the company which can affect the audit of the financial statements.
Monetary principle: The given principle states that the business transactions should be recorded in terms of a unit of a currency. As a result, it is easy to record buying of a fixed asset as it is purchased for a fixed price while the value of system of quality control of a business cannot be recorded. The principle helps in estimation of the prices of assets and liabilities of the company.
Time period principle: As per this principle, the results of business operations should be reported over a stipulated period of time. The standard time period helps in effective comparison of the results with the help of trend analysis. This is one of the most important principles among the various financial accounting principles.
Cost principle: According to this principle, the recording of business assets, equity investments and liabilities should be recorded at their actual purchase costs. The principle is losing its validity as most of the accounting standards are resorting to the fair value concept that includes adjustment of assets and liabilities as per the fair values of these assets.
Full Disclosure principle: This principle states that the business should make effective disclosure of the relevant information of the financial statements that can affect the understanding of the various types of stakeholders of the financial information. The accounting standard have emphasized on this principle by specifying a large number of financial disclosures.
Principle of going concern: As per this principle, it is stated that the business will continue to operate in future for a number of years. This means that the business should justify the deferring of certain expenses like depreciation for the later time period. This is necessary otherwise the business has to recognize the different expense at once which is impractical from the business viewpoint.
Matching principle: The matching principle provides that in case of revenue recording, all the associated spending should be recorded at that very moment. For example, the inventory should be charged to the cost of goods sold at the very same time when the recording of revenues from the selling of such kind of inventory items is made. This is the major basis of accrual basis of accounting. The organisations that are following the cash basis of accounting do not use the matching principle.
Principle of revenue recognition: The principle highly focuses on the fact that the revenue should be recognized only when the substantial earning process from the related transaction is completed. In the modern business scenario, a number of standard setting organisations have developed a number of mechanisms to provided information with respect to the proper revenue recognition.
Principle of Materiality: This principle states that the only those financial information that would be quite significant or material to the different types of users of the financial information and statements should be used in the financial reports of the company and all the information that does not significantly impact the interest of the various users of the financial information and statements should not be used in the financial reports. For example, in case of a large organisation recording of small expenses related to office expenses is not material but for a small company, recording of these transactions is quite material as it will impact its expenses.
Principle of Conservatism: The principle states that if in case a condition arises in which there are two different options for recording of an item, the principle of conservatism enable the organisation to adopt the option the outcome of which will result in low net income and low amount of asset. The principle helps in recording of substantial losses of the organisation well in advance before their occurrence.
Accrual principle: As per this principle, it is stated that recording of accounting transactions should be in the accounting period in which they actually take place instead of the period in which the cash flow associated with these transactions are actually experienced. The accrual form of accounting is based on this principle.
All these accounting principles helps in creating a standard format for financial reporting. The principle help in determining complete transparency with respect to various reporting entities. The proper functioning of the company is ensured when the different types of accounting principle are applied by the company in its working and as a result the investors and the shareholders can be satisfied regarding the true and fair operations of the organisation.
The different financial accounting principles enable the organisation to effectively fulfill the accounting related needs of the organisation. The proper adherence to these principles ensures fairness of the financial reports of the organisation. The accounting principles of different countries are not same and thus the investors should take proper care when comparing investing options in different countries. Therefore, Principles of Financial Accounting is able to generate useful information about different kinds of financial accounting principles and enhances the knowledge of the students with respect to the concept of principles of financial accounting and how the organisation is benefited from these principles
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