3 1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements Principles of Accounting, Volume 1: Financial Accounting

Under the principle of consistency, accountants must clearly state any changes in financial data on financial statements. GAAP compliance makes the financial reporting process transparent and standardizes assumptions, terminology, definitions, and methods. External parties can easily compare financial statements issued by GAAP-compliant entities and safely assume consistency, which allows for quick and accurate cross-company comparisons. Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting.

You will often see the terms debit and credit represented in shorthand, written as DR or dr and CR or cr, respectively. Depending on the account type, the sides that increase and decrease may vary. We can illustrate each account type and its corresponding debit and credit effects in the form of an expanded accounting equation. You will learn more about the expanded accounting equation and use it to analyze transactions in Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions. In Introduction to Financial Statements, we addressed the owner’s value in the firm as capital or owner’s equity.

Basic Accounting Principles and Guidelines

Industry Practices Constraint – some industries have unique aspects about their business operation that don’t conform to traditional accounting standards. Thus, companies in these industries are allowed to depart from GAAP for specific business events or transactions. Going Concern Concept – states what are the basic accounting principles that companies need to be treated as if they are going to continue to exist. This means that we must assume the company isn’t going to be dissolved or declare bankruptcy unless we have evidence to the contrary. Thus, we should assume that there will be another accounting period in the future.

Objectivity Principle – financial statements, accounting records, and financial information as a whole should be independent and free from bias. The financial statements are meant to convey the financial position of the company and not to persuade end users to take certain actions. Revenue Recognition Principle – requires companies to record revenue when it is earned instead of when it is collected.

Gross Revenue vs. Net Revenue: An Explainer

Monetary Unit Assumption – assumes that all financial transactions are recorded in a stable currency. Companies that record their financial activities in currencies experiencing hyper-inflation will distort the true financial picture of the company. However, the FASB and the IASB continue to work together to issue similar regulations on certain topics as accounting issues arise. For example, in 2014, the FASB and the IASB jointly announced new revenue recognition standards. Just upload your form 16, claim your deductions and get your acknowledgment number online.

If a business’s annual revenue exceeds $5 million, it’s required to use the accrual method. By law, accountants for all publicly traded companies must comply with GAAP. Cost accountants create a constant record of all costs incurred by the business. This data is used to track where the company spends and improve the management of these expenses.

Historical Cost Principle

The revenue recognition principle directs a company to recognize revenue in the period in which it is earned; revenue is not considered earned until a product or service has been provided. This means the period of time in which you performed the service or gave the customer the product is the period in which revenue is recognized. The information contained in the book is accurate and inline with what would be expected from an introduction to financial accounting textbook. Principles of Accounting Volume 1 could be presented much more concisely, more simply; and with better clarity.

• The conservatism principle directs accountants to be cautious in recognising potential gains, only recognising them when realised while recognising potential losses as soon as they are probable.
• This textbook uses of T-accounts and diagrams to make the concepts become clearer for students.
• This allows you to accurately compare performance in different accounting periods.
• The “going concern” accounting principle says you should assume that your business is in good financial condition and will remain in operation for the foreseeable future.

This sounds straightforward, but accounting can impact both internal and external opinions. Because of this, many publicly traded companies report both GAAP and non-GAAP income. Sometimes, this extra data can help the public image of a company or clarify the value of a company’s investments.