Accounting Principles
Accounting as it exists today may be viewed as a system of assumptions, doctrines, tenets, and conventions, all encompassed by the phrase “generally accepted accounting principles.”Many of these principles developed gradually, as did much of common law; only the accounting developments of recent decades are prescribed in statutory law. Following are several fundamental accounting concepts.
The entity concept states that the item or activity (entity) that is to receive an accounting must be clearly defined, and that the relationship assumed to exist between the entity and external parties must be clearly understood.
The going-concern assumption states that it is expected that the entity will continue to operate indefinitely.
The historical-cost principle requires that economic resources be recorded in terms of the amounts of money exchanged; when a transaction occurs, the exchange price is by its nature a measure of the value of the economic resources that are exchanged.
The realization concept states that accounting takes place only for those economic events to which the entity is a party. This principle therefore rules out recognizing a gain based on the appreciated market value of a still-owned asset.
The matching principle states that income is calculated by matching a period’s revenues with the expenses incurred in order to bring about that revenue.
The accrual principle defines revenues and expenses as the inflow and outflow of all assets—as distinct from the flow only of cash assets—in the course of operating the enterprise.
The consistency criterion states that the accounting procedures used at a given time should conform with the procedures previously used for that activity. Such consistency allows data of different periods to be compared.
The disclosure principle requires that financial statements present the most useful amount of relevant information—namely, all information that is necessary in order not to be misleading.
The substance-over-form standard emphasizes the economic substance of events even though their legal form may suggest a different result. An example is the practice of consolidating the financial statements of one company with those of another in which it has more than a 50 percent ownership interest.
The conservatism doctrine states that when exposure to uncertainty and risk is significant, accounting measurement and disclosure should take a cautious and prudent stance until evidence shows sufficient lessening of the uncertainty and risk.
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Read about Financial Accounting here
Read about Managerial Accounting here
Read about Auditing here
Read about income taxation here
Read about accounting for nonbusiness organizations here
Read about financial reporting here
Read about income balance sheet here
Read about Income Statements here
Read about Accounting Regulations and Standards in the United States
Source: “Accounting and Bookkeeping”Microsoft® Encarta® Online Encyclopedia
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