Accounting principles are a set of standards for how to do your accounting or bookkeeping. These standards are meant to ensure reliable and comparable accounting.
What does this mean? Well, it should be possible for someone to look over your bookkeeping and understand the financial history of your business. That’s why businesses have to follow these standards—so that financial information is transparent and consistent no matter where a business operates.
Large companies in the US use the Generally Accepted Accounting Principles (GAAP), while large companies in the rest of the world uses the International Financial Reporting Standards (IFRS). Smaller companies generally have other standards, which will vary depending on what country you’re based in.
What are the accounting principles
These are the key accounting principles that set the standard for how you should do your bookkeeping.
Accrual principle
You should record transactions when they occur, not when payment is made. For example, if you purchase a new laptop in February, the transaction is recorded in February, even if you don’t pay for the laptop until March.
Conservatism principle
You should record expenses as soon as possible, while revenue and assets should only be recorded when you’re sure they’ll occur.
Consistency principle
Once you start using an accounting principle or method, you should continue to use it, so that you can compare your financial statements over time.
Cost principle
You should record assets, liabilities, and equity at their original cost, and not adjust for factors like depreciation or market value changes.
Economic entity principle
You should record business transactions separately from personal and investor dealings, to ensure clear financial records.
Full disclosure principle
In your financial statements you should include any information that is important for a reader to know and that would impact their understanding of the statements.
Going concern principle
You should do your accounting with the assumption that your business will operate for the foreseeable future. This means you can defer certain expenses, such as deprecations.
Matching principle
When you record revenue, you should record related expenses at the same time. If you sell items from your inventory, you record the earnings from the sale at the same time as you reduce the value of your inventory.
Materiality principle
You should record a transaction in your accounts if not recording it could change the decision making of someone reading your financial statements.
Monetary unit principle
You should only record transactions that can be stated in a currency. This means that businesses cannot overestimate their assets and liabilities.
Reliability principle
You should only record transactions that can be proven with receipts, invoices, or other documentation.
Revenue recognition principle
You should record revenue when you deliver products or services, regardless of when the payment is made.
Time period principle
Financial reporting should cover specific periods, to allow you to analyse trends and for easier comparison with other financial reports.
Make sure to comply with accounting principles
Following these accounting principles is essential to comply with rules and regulations, maintain financial integrity, and to make informed decisions about your business going forward.
If you’re uncertain about how to do your accounting, an accountant can help you.