Generally Accepted Principles of Accounting
Generally accepted principles of accounting means a common set of accounting principles, standards and procedures which is issued by the Financial Accounting Standards Board (FASB). GAAP is required to be followed by the public companies in the U.S. when their accountants compile the financial statements of their business firms. This improves consistency, comparability, clarity, and communication of the financial norms and details of the financial background.
There are 10 principles of GAAP:
Principle of Regularity - The accountants are strictly required to adhere to established rules and regulations according to the GAAP compliance.
Principle of Consistency - The financial reporting process includes all the consistent standards which are applied throughout.
Principles of Sincerity - There is the commitment of accuracy and impartiality according to the GAAP compliant accountants
Principles of Permanence of Methods - There is a consistent set of procedures that are used for the preparation of financial reports.
Principles of Prudence - The reporting of financial data is not influenced by speculation.
Principle of Non-compensation - The reporting with no prospects of debt compensation is conducted from all the aspects of an organization whether it is positive or negative.
Principle of Continuity - The operations of the organization will continue according to the valuation of the assets.
Principle of periodicity - Fiscal quarters or disc years included reporting of revenues which is divided by standard accounting periods.
Principle of Materiality - The organization's full monetary situation is disclosed by financial reports.
Principle of Utmost Good faith - The assumed parties are expected to be acting honestly.
Why are Accounting Principles Important?
Accounting principles are important as they ensure consistency when it comes to keeping financial records worldwide. They describe certain values and principles, which companies are expected to adhere to obtain a more accurate and effective view of the company's statements and reports.
Among the Several Accounting Concepts, the Following are the Most Important:
Money Measurement policy: In accounting, all business transactions are measured financially as a standard unit of measurement. Since money is a standard unit of measurement, as a measure of accounting, you are only allowed to record those transactions or events that can be measured or disclosed in cash.
Business entity concept: This concept of accounting system looks at the business and the business owner differently in terms of their financial transactions. Legally, your business can exist without you and your company can sue or be sued in its name.
Going Concern Concept: This principle applies to the fact that every transaction is recorded assuming that the business will remain viable for a long time and will be able to fulfill its obligations accordingly.
Cost Principle: This accounting policy sets out the rules for accounting for fixed assets. In terms of cost, all fixed assets are calculated at the actual cost i.e. the amount paid to acquire them and thereafter, year after year, the value decreases based on usage, aging, accidents, overtime etc.
Dual-Aspect concept: This calculation principle states that for every deduction, corresponding credit is made. This is the foundation on which the accounting system is implemented. This is important to understand it in detail.
Accounting Year concept: This means that each entity selects a specific period to complete the accounting and reporting cycle. In short, this principle deals with the periodicity of accounting. The time can be monthly, quarterly or yearly.
Matching Concept: The concept emphasized in the accounting principle is that if any revenue is recognized the costs associated with earning that revenue should also be considered. This gives a true picture of the profit earned during the accounting process.
Realization concept: The concept of accounting suggests that revenue is reported when received, regardless of when the payment is received. Anything paid or received is not considered profitable until the goods or services have been delivered to the buyer.
FAQs on Objectives and Functions of Accounting
1. What is Meant by the Book-Keeping Process?
The term bookkeeping refers to the recording of financial transactions and activities daily. This is a subset of accounting that requires the following jobs which are required to be done to build a financially stable business. The process of bookkeeping involves the four basic steps:
Analysing the financial transactions and assigning them to specific and respective accounts.
Writing original journal entries which credit and debit the appropriate accounts.
Posting entries to their ledger accounts.
Adjust the entries at the end of each accounting period.
2. What is a Ledger?
A ledger is a book that contains accounts that are classified and summarized into information from the journals and are posted as debits and credits. The ledger contains the information which is required to prepare the financial statements. This includes the accounts for assets, liabilities, owners' equity, revenues and expenses.
Ledger is a separate record within the general ledger that is assigned to a specified asset, liability or an equity item, revenue type, or it may be expense type. An example of a ledger account is Accounts Receivable.
3. What are Mergers and Acquisitions?
Mergers and acquisitions, abbreviated as M&A, involve the process of combining the two companies into one single company. The goal of combining these two or more businesses is to try and achieve synergy, where the whole new company will be greater than the sum of its parts.
A merger occurs when two separate entities combine their forces to create a new, joint organization. On the other hand, an acquisition refers to the takeover of one entity by another entity. Mergers and acquisitions may be done to expand a company's reach or gain maximum market share in an attempt to create shareholder value.
4. What are the three golden rules of accounting?
The three golden rules of accounting are classified according to the different accounts. These golden rules revolve around the debit and credit of your business operation. These are as follows:
On the basis of Personal Account - Debit the Receiver and Credit the giver.
On the basis of Nominal Account - Debit all expenses and losses whereas credit all incomes and gains
On the basis of Real Accounts - Debit what comes in and credit what goes out.
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