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What are accounting Principles?
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Answer Posted / wanny
Principles derive from tradition, such as the concept of
matching. In any report of financial statements (audit,
compilation, review, etc.), the preparer/auditor must
indicate to the reader whether or not the information
contained within the statements complies with GAAP(Generally
Accepted Accounting Principles). The Following are the
Principles of Accounting.
1. Principle of regularity: Regularity can be defined as
conformity to enforced rules and laws.
2. Principle of consistency: This principle states that
when a business has once fixed a method for the accounting
treatment of an item, it will enter in exactly the same way
all similar items that follow.
3. Principle of sincerity: According to this principle,
the accounting unit should reflect in good faith the reality
of the company's financial status.
4. Principle of the permanence of methods: This principle
aims at allowing the coherence and comparison of the
financial information published by the company.
5. Materiality concept: An item is considered material if
its omission or misstatement will affect the decision making
process of the users. Materiality depends on the nature and
size of the item. Only items material in amount or in their
nature will affect the true and fair view given by a set of
accounts.
6. Principle of non-compensation: One should show the full
details of the financial information and not seek to
compensate a debt with an asset, revenue with an expense, etc.
7. Principle of prudence: This principle aims at showing
the reality "as is": one should not try to make things look
prettier than they are. Typically, revenue should be
recorded only when it is certain and a provision should be
entered for an expense which is probable.
8. Principle of continuity: When stating financial
information, one should assume that the business will not be
interrupted. This principle mitigates the principle of
prudence: assets do not have to be accounted at their
disposable value, but it is accepted that they are at their
historical value
9. Principle of periodicity: Each accounting entry should
be allocated to a given period, and split accordingly if it
covers several periods. If a client pre-pays a subscription
(or lease, etc.), the given revenue should be split to the
entire time-span and not counted for entirely on the date of
the transaction.
10.Principle of Full Disclosure/Materiality: All information
and values pertaining to the financial position of a
business must be disclosed in the records.
11.Principle of Utmost Good Faith: All the information
regarding to the firm should be disclosed to the insurer
before the insurance policy is taken.
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