The Principles of Financial Accounting

Whether you provide janitorial services, tend to animals, sell clothes or manufacture equipment, your business runs under the same basic principles of accounting. These are generally accepted accounting practices that have been commonplace since the 19th century.

Currently, there are no universally standardised accepted finance accounting principles, but there are several accounting frameworks that set the standard body including the Australian Accounting Standards Board.

The Principles of Financial Accounting

But why are financial accounting principles essential?

The reason accounting principles exist is to be able to communicate financial information in a manner that’s comprehensible and acceptable from one business to another. Firms that release their financial information to the masses have to follow these principles as they prepare their statements.

Well, depending on the features of an entity or business, company law and several other regulations determine the accounting principles that they need to apply. That being said, let us take a look at some of the financial accounting principles.

The Objectivity Principle

In the concept of accounting records, financial statements and any financial information must be free from bias. Financial statements are designed to show the financial position of a business and not persuade the end-users to take particular actions.

The Conservatism Principle

This principle states that in a situation where there are two acceptable solutions for reporting something, the accountant should pick the less favorable result. This prevents cases of underestimating future expenses and overestimating future revenues, thus misleading financial statement users.

The Cost Principle

This principle states that a company should record their equity investments, liabilities and assets at their original buying costs instead of their current value. However, this is a concept that is not widely applied. Recent developments in the accounting industry have made the practice of recording the above items at their fair values rather than their initial purchase price popular.

The Consistency Principle

This concept outlines that the same accounting method should be applied throughout all transactions and for an extended period. If a company frequently changes their accounting practices and methods, it can skee the reporting, making long-term results hard to interpret.

Full Disclosure Principle

This principle states that companies should report all relevant information regarding their financials to every party that’s inclined to read the information. The full disclosure principle ascertains that all viewers of a firm’s financial information aren’t left out or misled.

The Matching Principle

This one demands that a company should report expenses on the income statement at the same time that the revenue is earned. If the expense isn’t directly tied to the revenues then it must be recorded on the income statement during the expiry period.

The Monetary Unit Principle

This one mandates that companies should only report transactions that can be reported in the form of a unit currency. An example would be an asset that’s bought for a specific price. The monetary unit principle guides companies to avoid estimating their value of assets and liabilities.

All these principles are essential to comprehending the financial accounting field.

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