Think of accounting principles as the basic philosophies of accounting. Materiality: companies should always record transactions that are important enough to the company that they may alter decisions shareholders may make regarding their investments in the firm.Consistency: once a company adopts a certain accounting method, it will continue to use it consistently going forward unless and until it adopts a different methodology in subsequent years.Conservatism: recording revenues, assets, expenses and liabilities only when the company is reasonably certain they will occur.In our case, that means even though Company XYZ may not write a check to its vendors for the $250,000 of raw materials until 2019, it should record those costs in 2018 because that is the period in which they were incurred.Įxamples of some other accounting principles include: For example, the accrual and matching principles require companies to match revenues and expenses with the period in which they are incurred, regardless of whether any cash changes hands. Company XYZ sells $500,000 of widgets in the 2018 calendar year and incurs $250,000 of raw materials costs Company ABC sells $750,000 of widgets in 2018 and incurs $450,000 of raw materials costs.Īccounting principles designate at the most fundamental level how both companies should record those revenues and expenses. They both earn revenue and incur costs, and they both record those revenues and costs to prepare their financial statements. To see how accounting principles apply in the real world, let’s assume Company XYZ and Company ABC both sell widgets. The International Accounting Standards Board also sets forth accounting principles, called International Financial Reporting Standards. These details can be found in such places as quarterly balance sheets or income statements, 10-Q filings, or annual reports.Īccounting principles are the bases for the more specific Generally Accepted Accounting Principles (GAAP), which are established and administered by the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB). How Do Accounting Principles Work?Īccounting principles govern how accountants calculate and present the details of a company's financial operations, such as net earnings, gross income, and net cash provided by operating activities. However, the SEC allows the FASB to research and develop accounting rules or standards.Accounting principles govern the rules of accounting and reflect the latest accounting methodologies. government agency, has the ultimate authority over the reporting requirements of publicly traded corporations.
The Securities and Exchange Commission (SEC), a U.S. These CPAs give assurance that the financial statements were prepared in accordance with GAAP. Corporations whose stock is publicly traded must have their financial statements audited by independent certified public accountants. The specific rules issued by the FASB are organized in an electronic database known as the FASB Accounting Standards Codification.įinancial statements that are distributed outside of a company are to be prepared in accordance with generally accepted accounting principles.
#Basic accounting principles crossword answers full#
The general guidelines, or basic accounting principles, include the cost principle, matching principle, full disclosure principle, going concern assumption, economic entity assumption, monetary unit assumption, materiality, and industry peculiarities or practices. Accounting principles range from general guidelines to very detailed rules established by the Financial Accounting Standards Board (FASB). Accounting principles are also referred to as generally accepted accounting principles or GAAP.