The rules and the instructions that the different companies must follow at the time of recording the financial statements. The principles of accounting help in leading the whole process of accounting with the general directions and the various perceptions. The accounting principles create the base for the more intricate, comprehensive and the legalistic rules of accounting. There are several principles in the field of accounting, but some of them are explained below:
- Accrual Principle
In this concept, a record and proper track should be maintained of all the accounting transactions. But, it should be done during the period of accounting i.e. when they actually occur and not in the period of cash flow associations. By working on this, the accrual basis of accounting is established. It is essential to form the financial reports that reflect the actual event and the occurring of the transaction in that particular accounting period. For example: without the accrual principle, you would only be able to remember the expense you cleared only at the time of payment. Because of which you may have to pay it again at the time of making the financial reports.
- Consistency Principle
The concept says that if some company or an organization has started with some particular method or a procedure, then the company must continue to use that particular method until another method that is equal to or more productive than that one. If an organization doesn’t follow the principle of consistency that means if the organization keeps on changing its methods of working, this may result in an extremely difficult situation for the long-term financial outcomes.
- Cost Principle
In the concept of the cost principle, the organization must make a note and record of the assets, liabilities, and equity investments at the original cost of purchasing. But now, this concept is becoming less effective. This is because the host of the accounting standards are planning to adjust the assets and the liabilities at their rational values.
- Going Concern Principle
This particular concept says that a business organization must stay in action for a calculative and predictable future. With this concept, you would be able to make a true track by finding out the expenses, such as in the case of depreciation, until the later periods.
- Matching Principle
The matching concept says that a record of all the expenses should be maintained at the time of recording the revenue. Hence, inventory is charged to the cost of goods sold at the same time when you make a note of the incomes by selling the items related to the inventory. The matching principle is not used by the cash basis of accounting.
- Materiality Principle
The materiality principle says that a transaction must be recorded in the accounting reports. If this is not done, this may lead to an alteration or a change in the process of making decisions by anyone else who is working on that particular report.
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