Accounting involves some general rules and concepts, which are also known as accounting principles and guidelines that form the basis on which more complex and exhaustive accountancy rules are based. Some of them have been explained below in this article:-
There are different types of assumptions in accounting. In Economic Entity Assumption, an accountant records all financial transactions taking place in a business as a sole proprietorship which is different from the personal transactions of the business owner. Legally, a sole proprietorship and its owner are regarded as a single entity, but in accountancy both are regarded as two separate entities. The Monetary Unit Assumption on the other hand affirms that data in the financial statements need to be exhibited in monetary units. As economic activity is regarded as a monetary unit, it is logical to apply it for purposes of accounting. Monetary Units are available most of the time and can be easily understood.
From an accountants perspective, the term cost is the amount that is spent when an item is obtained originally, whether the purchase took place a year ago or ten years ago. Because of this reason, the amount mentioned in financial statements is also known as historical cost amounts. Due to this account principle asset amounts are not attuned upward for inflation. As a general rule, asset amounts are not adjusted so as to show any increase in value. So, asset amount doesnt show the amount which a company would receive if it was to sell a specific asset in the present market value.
The Full Disclosure Principle states that if a specific information is significant for an investor or lender who is using financial statements, it should be revealed within the statement or in its notes. Due to the Full Disclosure Principle, there are many pages of footnotes which are affixed to financial statements. Normally, an organization lists all of its important accounting policies as the first note to financial statements.
Due to the principle of materiality, an accountant may be allowed to break another accounting principle provided the amount is unimportant. He has to decide whether the amount involved is unimportant or not. Due to materiality, financial statements normally show amounts rounded off to nearest dollar, to the nearest thousand, or nearest million dollars depending on an organizations size.
In case a circumstance arises when there are two acceptable options for reporting an item, conservatism helps the accountant to go for the alternative which will lead to less net income or less asset income. It doesnt advice accountants to be conservative, but rather objective and impartial.
Accounting principles and guidelines used by organizations not only to make financial statements, but also for guidance on methods and decisions in the long and short term. In order to prepare internal and external reporting purposes, it is important to have a clear perception of these concepts as they are used as guidelines while analyzing issues related to financial reporting.