Accounting principles are guidelines and rules that companies must follow when recording and presenting financial information in their books of accounts. This helps ensure that the information reported is complete, accurate, consistent, and comparable, which allows investors and lenders to make more informed decisions about a company’s performance.
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What are the 3 principles of accounting?
The implementation of standardized accounting practices also makes it easier for users to examine a company’s financial statements tax services. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) set the accounting standards that are enforced by companies.
1. Accrual principle
The accrual principle is the concept that a business should record its accounting transactions in the period they occur, not when cash flows are associated with them. For example, if the business sells products on credit, it should record sales in the period they occur, not when cash is received from customers. This is a cornerstone of the accrual basis of accounting and is the reason that companies can’t use cash basis accounting with IFRS.
2. Cost principle
The cost principle states that all assets should be recorded at their historical costs, regardless of whether the value increases or decreases over time. It is a fundamental requirement of the fabric of accounting and is important because it enables organisations to disclose a full picture of all their assets and liabilities in their financial statements.
3. Materiality principle
The materiality principle states that any accounting transaction must be recorded if it is likely to affect the decision making process of someone reading the company’s financial statements. This ensures that all relevant information is included in the financial statements, and that no material errors or violations of valuations are overlooked.