GAAP (Generally Accepted Accounting Principles) are a set of general accounting principles and guidelines that serve as the foundation for more formal and stringent accounting laws, standards, and other industry-specific accounting procedures.
The Financial Accounting Standards Board (FASB), for example, employs these ideas to define its own accounting standards.
We’ll go through some of the most fundamental accounting principles.
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Basic Principles of Accounting
To maintain the most accurate financial situation, any organization must understand basic accounting principles.
Since your clients and stakeholders rely on you, it’s critical to keep track of accurate and validated data.
What are accounting’s five basic principles? Let’s look at the concepts themselves to gain a better understanding of them.
Revenue Recognition Principle
When documenting information about your company, keep the revenue recognition principle in mind since this is the period during which your company’s revenues are recorded on the income statement
Based on these accounting principles, if you use the accrual method, your revenues must be recognized in the period in which the services were provided, whereas if you use the cash method, your revenues must be recognized in the period in which the cash was received.
Keep track of your assets when you buy a product or service to keep your business’s expenses in order.
It’s important to keep track of the purchase price of whatever you spend money on, as well as the depreciation for those assets.
Expenses should be matched to revenues recognized in the same accounting period, and expenses should be reported in the period in which they occurred.
If revenue was recognized on sold products or services for a period of time, the cost of those items should also be recognized.
Full Disclosure Principle
This accounting principles stated that financial statements should include all relevant facts so that nothing is misled. Important partners or clients will be aware of pertinent facts about your organization as a result of this strategy.
Accounting information should always be accurate and free of bias, therefore, ensure that the data is backed up by documentation such as vouchers, receipts, and invoices.
In this scenario, having an objective viewpoint aids in relying on financial results.
Going Concern Principle
The going concern principle assumes that the company will continue to exist and operate with no set expiration date, implying that it will not be liquidated in the near future.
Deferring the recognition of expenses to a later accounting period is due to this basic accounting principles.
When an accountant reconciles a set of records or completes a business tax return, the materiality principle may come into play.
If the accountant discovers that the account is inaccurate by a minor amount in comparison to the overall size of the company, they may dismiss the disparity as unimportant.
The accountant must use their professional judgment to assess whether the sum is insignificant.
Key Takeaways of The Accounting Principles
At the end of the day, accounting is a big and difficult field—but by grasping these basic accounting principles, you’ll have a better understanding of a key component of your company’s financial procedures, whether or not you outsource them to a professional.
Plus, by understanding and following these accounting concepts, you’ll be able to communicate more successfully with any accountant or bookkeeper you hire throughout the life of your organization.
However, while not every corporation is compelled by law to follow GAAP, most accountants will insist on doing so to guarantee that the integrity of your company’s financial statements is never questioned.
As a result, if you have any questions regarding your bookkeeping and accounting chores and processes, and how they may or may not relate to any of these accounting principles, you should ask your accountant or, if you don’t have one yet, seek one out.
This way, you’ll have all of the accounting information you need to deal with problems as they emerge and, in the end, boost your company’s financial success.