Every profession dictates its own principles to follow and accounting is no exception. Though accounting principles are multifarious, their fundamentals are neither difficult to understand nor being put into practice. Accounting principles comprise of four essential assumptions, four essential principles plus four essential restrictions. These accounting principles are referred to as GAAP, Generally Accepted Accounting Principles and are applied for handling the ways through which funds flow into or out of business and the way adapted for their documentation.
This principle says that rather than recording the market value, which takes into consideration various factors, including adjustment towards inflation, the cost of assets to be recorded should be their actual cost. This is to ensure that cost recorded for physical ystocks and additional purchases is accurately reflected in accounting ledger. This principle is also called as ‘historical cost principle’ since costs for purchases are documented as per the actual amount spent at the point of procuring those materials rather than making an adjustment at any time in future.
As per this principle revenue needs to be recorded in book at the time when it is made and not when payment is collected. This is to eliminate inaccuracies in accounting that may be caused as a result of belated payments as any amount of money that is still due to the company is recorded in the ledger of accounting. At times this principle is called as ‘accrual principle’ as it provides the basis for accrual method of accounting.
This principle stipulates that the expenses be in line with the proceeds to which they are correlated. The expenses are not accounted for when these are incurred but only after they have made a contribution to income. This allows easy evaluation of profit due goods or services and also shows up the relationship between outlay and income as goods and services straightway tally with the income they create. Certain expense like salaries of employees and other administrative expenses can’t straightway be connected to revenue and are therefore simply recorded as expense for the existing time.
Now, let’s come to the last of the accounting principles, which says that the entire financial information revealed for any business ought to be in a format that is easy understood and should be balanced against the expense of gathering and releasing that information. Any piece of information provided for understanding financial statements needs to be incorporated in the statement or be pointed out in appendix or supplementary document offered along with the statements. The information so offered should suffice for company’s executives to take decisions concerning the affairs of the company, whereas superfluous information be rationalized for keeping down the expense of making statement.