Accounting Principles: Basic Definitions, Why Theyre Important

When accounting principles allow a choice among multiple methods, a company should apply the same accounting method over time or disclose its change in accounting method in the footnotes to the financial statements. Accounting concepts and principles are a set of rules and assumptions that are necessary to set a standard while recording financial transactions as well as maintaining books of accounts in the business. The main purpose of accounting principles is to guarantee that a business’s financial recordings and statements are consistent and to the point. Accurate knowledge of accounting principles makes it easy for investors to extract and analyse necessary information from financial statements. Income statements are one of three standard financial statements issued by businesses. Businesses and organizations use a system of accounts known as ledgers to record their transactions.

Some students enter accounting programs with little technical knowledge — and that is OK. This guide is an easy-to-use resource for developing the vocabulary accounting professionals use. I did not find any culturally insensitive or offensive content in this textbook. This textbook has all of the content that I cover with the publisher textbook that I have used for the past 6 years.

Accounting Period

I read a couple of chapters in greater depth and find the textbook offers remarkable clarity, making complex concepts easily understandable for readers. While the United States does not require IFRS, over 500 international SEC registrants follow these standards. GAAP may seem to take a “one-size-fits-all” approach to financial reporting that does not adequately address issues faced by distinct industries. For example, state and local governments may struggle with implementing GAAP due to their unique environments. New GAAP hierarchy proposals may better accommodate these government entities.

For that reason, open source texts such as this one should be more widely used. The small incremental changes made in the basic structure of accounting do not warrant the frequent new editions that publishers try to push through. The only elements that would need to be updated may be the dates after a period of time so that they are more current and perhaps a few of the examples. The basic accounting elements however will not become obsolete and will remain relevant for the foreseeable future.

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

Examples of commonly used accounting periods include fiscal years, calendar years, and three-month calendar quarters. An accounting cycle is an eight-step system accountants use to track transactions during a particular period. Lastly, the time period principle essentially states that businesses should try to report the results of their activities over a set and standard period of time. For instance, accountants should not record business transactions over a quarter of three months, then record business transactions over a single month timeframe later. This allows accountants to make standard sets of comparable timeframes, helping them to create long-form or trend analyses using accounting software .

The basic accounting principles listed here overlap with a handful of GAAP concepts, like matching and materiality, but do not cover all of them. For a full rundown of GAAP and what each concept means, see NerdWallet’s generally accepted accounting principles (GAAP) explainer. Fees earned from providing services and the amounts what are the basic accounting principles of merchandise sold. Under the accrual basis of accounting, revenues are recorded at the time of delivering the service or the merchandise, even if cash is not received at the time of delivery. For U.S. companies, the monetary unit assumption allows accountants to express a company’s wide-ranging assets as dollar amounts.

Key Principles of GAAP

As illustrated in this chapter, the starting point for either FASB or IASB in creating accounting standards, or principles, is the conceptual framework. Both FASB and IASB cover the same topics in their frameworks, and the two frameworks are similar. The conceptual framework helps in the standard-setting process by creating the foundation on which those standards should be based.