Accounting principles accounting principles EnglishAccounting Principles Used to Prepare the Financial Statements 1 Table of Content 1Introduction 1 2 Analysis of eight accounting principles 1 21 Time

kes accounting information more timely, relevant, and useful for decision-making. For example, a company’s financial statements for the year ending December 31, 2020, will only include transactions that occurred between January 1 and December 31 of that year.

2.2 Principle of Historical Cost

The Principle of Historical Cost states that assets should be recorded at their original cost, rather than their current market value or replacement cost (Zeff, 2012). This principle is important because it provides a reliable basis for measuring an enterprise’s financial position and performance over time. For example, if a company purchased a building for $500,000 in 2010, and the building’s current market value is $1 million, the building will be recorded on the balance sheet at its original cost of $500,000.

2.3 Full Disclosure Principle

The Full Disclosure Principle requires that all information material to a company’s financial statements should be disclosed in the footnotes or supplementary schedules (Schipper, 2003). This principle ensures that users of financial statements have access to all relevant information necessary to make informed decisions. For example, a company should disclose any significant lawsuits or contingent liabilities in the footnotes to the financial statements.

2.4 Matching Principle

The Matching Principle requires that expenses be recorded in the same period as the revenues they helped to generate (Zeff, 2012). This principle ensures that income is reported in the period in which it was earned, and expenses are matched to the period in which they were incurred. For example, if a company sells goods in December but does not receive payment until January, the revenue from the sale should be recorded in December, when the goods were sold.

2.5 Going Concern Principle

The Going Concern Principle assumes that an enterprise will continue to operate for the foreseeable future (Schipper, 2003). This principle provides a basis for measuring assets and liabilities at their historical cost, rather than at their liquidation value. For example, if a company is expected to continue operating for the next five years, its assets and liabilities will be recorded at their historical cost, rather than at their liquidation value.

2.6 Revenue Recognition Principle

The Revenue Recognition Principle requires that revenue be recognized when it is earned, regardless of when payment is received (Zeff, 2012). This principle ensures that income is reported in the period in which it was earned, rather than when payment is received. For example, if a company sells goods in December but does not receive payment until January, the revenue from the sale should be recorded in December, when the goods were sold.

2.7 Materiality

The Materiality Principle states that an item should be disclosed in the financial statements if it is material to the financial position or performance of the enterprise (Schipper, 2003). This principle provides guidance on what information should be disclosed in the financial statements. For example, if a company has a small amount of inventory loss, it may not be necessary to disclose it in the financial statements.

2.8 Conservatism

The Conservatism Principle requires that when there is uncertainty about the amount or timing of future cash flows, the accountant should choose the method that results in the least favorable outcome for the enterprise (Zeff, 2012). This principle ensures that financial statements are not overstated, and that the risks facing the enterprise are adequately disclosed. For example, if a company is uncertain about the collectability of a large accounts receivable balance, it may choose to write off the balance as uncollectible, even if there is a chance that the customer will eventually pay.

3. Conclusion

In conclusion, the eight accounting principles discussed above are essential for preparing financial statements that are reliable, relevant, and useful for decision-making. These principles provide guidance on how to record transactions, measure assets and liabilities, and disclose information in the financial statements. By following these principles, accountants can ensure that financial statements accurately reflect the financial position and performance of the enterprise.

References

Schipper, K. (2003). Principles-based accounting standards. Accounting Horizons, 17(1), 61-72.

Zeff, S. A. (2012). The “what” and “why” of GAAP. Journal of Accountancy, 214(4), 22-27