As you plan to prepare standardized and consistent financial statements, you need the basic generally accepted accounting principles.
Basic accounting principles are guidelines, general rules, conventions, concepts or postulates that are ground rules, which must be followed when financial accounts are being prepared and presented and also govern the field of accounting. They are also referred to as assumptions or prepositions that underlie the preparation and presentation of financial reports.
These form a ground upon which more detailed rules and guidelines are based, discover more about the generally accepted principles of accounting; they must be the basic accounting principles and guidelines, they must be detailed rules and standards issued by Financial Accounting Standards Board (FASB) and Accounting Principles Board (APB) and finally they must be the generally accepted industry practices. This is what gives accounting principles and affirmation of being called the Generally Accepted Basic Accounting Principles, abbreviate it as GAAP.
Generally Accepted Accounting Principles intends to correct the clarity, adherence to principles, and comparability of the communication of financial information and transactions. Generally Accepted Accounting Principles rules the world of accounting while following the general rules and guidelines. Generally Accepted Accounting Principles intends to standardize and regulate the meanings and definitions, assumptions, and methods used in accounting across all industries.
The intended objective goal of Generally Accepted Accounting Principles is to make sure that a company’s financial statements are complete, accurate, baring consistent information and comparable with other transactions. It becomes easy to bring out the most important information to investors as fast as possible from the generated financial statements and data over a time period. The generally accepted principles also facilitate the comparison of financial information across different companies.
The basic and generally accepted principles of accounting
Economic Entity principle
This is the concept that the transactions of a business should be kept separate from those of its owners and other businesses. With Economic entity assumption, the person in charge of accounts (accountant) handles all the transactions of the business that is a sole proprietorship differently from the personal transactions of the business owner. Legally a sole proprietorship enterprise and the owner are taken to be the same or one common enterprise however according to accounting, they are considered to be two different enterprises
Monetary Unit principle
The monetary unit principle assumes that a business’s domestic currency is the appropriate unit of measure for the business to use in its accounting. Across East Africa, Africa and many other countries, over the time economic productivity and Gross Domestic Product (GDP) has always been and is still measured and transactions recorded in the US dollars. The monetary unit assumption principle assumes that the purchasing power of a dollar is constant and has not changed over time. Therefore the people in charge of accounts don’t consider how fluctuation in prices (inflation) affects the recorded transactions, meaning that cost of a dollar in 1980’s could be the same cost as of 2020.
Time Period principle
This is the concept that a business should report the results of its operations over a standard period of time. Time period principle as the name suggests indeed assumes that the capability of reporting the complicated and happening activities of an enterprise in short and brief, separate time ranges for example six months will be finalized in June 30th or in 6 weeks time. When the time period is short the accountant is more likely to estimate the amounts closely connected to that time period. For instance knowing that most of the tax bills are cleared in December or November. It is important to indicate the time period at the heading of every other statement of income, stake holder’s equity statement and cash flows statements. Therefore assigning categories to those statements by time period would make much more meaningful sense.
The cost principle states that amounts in your accounting system should be quantified, or measured, by using historical cost. According to the word by many accountants, costs means amount spent when an item was or is originally obtained. The time period of the purchase doesn’t matter whether the product was bought the previous year or fifteen years back. Having that at the back of the mind, the amounts of purchase shown on financial statements of transaction are referred to as historical cost amounts. Following cost principle, asset amounts are not adjusted upward for inflation and therefore asset amounts are not adjusted to reflect any type of increase in value, thus an asset amount would not reflect the amount of money a company would receive if it were to sell the asset at today’s market value. However for stocks and bonds that are active in the stock exchange market, you can know the current value of a company’s long term assets by getting information from a company’s financial statements.
Full Disclosure Principle
This principle states that you should include in or tag the financial statements of a business all of the information that may impact a reader’s understanding of those statements. You will find various pages of notes attached to financial statements; this is because full disclosure believes that if some information is crucial to an investor using the financial statements, that information should be disclosed within the statement or in the notes to the statement. For example if a company gives out some goods on a credit to another company or independent customer on a credit, it is recorded down in the financial statements and can be used for future reminder to pay back or take another action and those statements will be used for reference and defence against the company in case of denial. A company usually lists its significant accounting policies as the first note to its financial statements.
Going Concern Principle
Going concern principle takes an assumption that an enterprise will continue to live long enough to carry on or peruse its objective goals and dedications and will not convert its assets into cash or sell them on an open market and will continue to exist in the future to come. In case the company is in a financial dilemma or badly off financially and by all means there are no hopes of continuing to operate the account is in charge of and has the authority to talk about or reveal the assessment. The going concern principle allows the company to defer some of its prepaid expenses until future accounting periods.
The matching principle requires that revenues must be assigned to the accounting period in which the goods and services are sold or performed and expenses must be assigned to the accounting period in which they are used to produce revenue. Revenues and expenses can be accounted for on cash received and cash paid basis and this known as accrual basis of accounting. At times an individual or business may use the accrual basis of accounting for income tax purposes. Here revenues are reported in the period in which cash is paid. Taxable profit is calculated as the difference between cash receipts from revenues and cash payments for expenses. Revenues can be earned in the period other than the one in which cash is received and expense can be incurred in a period other than the one in which cash is paid. Therefore to measure net profit adequately, revenues and expenses must be assigned to the appropriate accounting period and this problem is solved by applying this principle.
Revenue Recognition Principle
The revenue recognition principle believes that you should only appreciate revenue when the business has substantially completed the earnings process. According to accrual basis of accounting (as opposed to the cash basis of accounting, revenues are noticed when a product is or has been sold or a service is or has been done, irrespective of when the cash is paid or cleared. Following revenue recognition principle, an enterprise can get over $ 10000 in the month of April and doesn’t get any amount received in cash for example, monkeypesa does a service for its client, the amount agreed upon should be recognize as soon as the service is done putting the time a side when the client pays. The time when the revenue accepted is different from the time of payment. Revenue differs from the cash receipt of payment.
Accountants must strive to fully disclose all financial data and accounting information in financial reports. Materiality principle allows accountants to violate other principles of accounting if an amount is undistinguished. Though this requires a judgment to tell whether the amount is undistinguished or not. This is the concept that you should record a transaction in the accounting records if not doing so might have altered the decision making process of someone reading the company’s financial statements.
Conservatism allows accountants to pick from an option that will bring in less net income or less asset amount in case there are two recognized ways of reporting an item. The principle of conservatism allows accountants not to be conservative but instead breaks the ties of conservatism. With this principle accountants are expected to be free from bias and not supposed to be subjective. Conservatism principles permits accountants to talk about and disclose information about losses made by a business or individual though the person is not allowed to disclose information about gains. For instance if MonkeyPesa makes losses, the accountant is allowed to disclose the losses that were encountered in the financial records and transactions however not allowed to disclose the same information about gains.
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