The main purpose of monetary accounting is to provide necessary economic info needed for decision-making in a company. Financial accounting follows certain rules and suggestions to prepare reports on the financial standing of an entity. These rules and suggestions are usually referred to as Generally Accepted Accounting Principles (GAAP). GAAP sets its accounting standards and guidelines for preparing monetary reviews for public, private, non-profitable organizations, and governments owned companies.
Readers of a financial report should be intimated if the information provided within the monetary statements follow the GAAP guidelines. The accountant or auditor is responsible for ensuring this procedure. Some basic accounting concepts and principles are:
Business Entity: This principal treats the company as a separate entity from its owners. Personal accounts of owners/partners ought to be kept separate from profits and expenses of the organization.
Cost: This theory states that the organization has to consider the original price of fixed assets like building and machinery, instead of market worth. But today most of the companies report only the market worth.
Sincerity: According to this principle, the auditors ought to prepare the monetary reports in order to project the actual financial position of the organization instead of fabricating facts.
Monetary Unit: This principle assumes that transactions should be recorded in a single currency and exchange rate. This will help the company compare its accounts to the previous years, in spite of the change within the rate of inflation.
Consistency: Based on this principle, the accountants ought to use the similar methods and functions for various periods of time. For example, the same rate of percentage should be applied for all depreciation. This principle is also known as the theory of regularity.
Prudence: The main objective of this theory would be to show the real financial position from the company. The accountants ought to show the correct revenue accounts and provide a provision for expenses which may occur within the future.
Matching: According to this theory, all the revenues and concerned expenses incurred should be shown within the same financial period. The primary objective would be to avoid any overstatements of earnings at any specific time.
Accrual: This principle requires the company to record the revenue or earnings when it's really earned.
Continuity or Going Concern: This principle presumes that the functioning of the company will be smooth and the company entity will continue to operate for a fairly long period.
Time Period: This principle specifies a particular interval of time for which the monetary reports are prepared. It can be either year, fiscal year or short period like a quarter or a month.
Full Disclosure/Materiality: This theory states that the full disclosure of information and events ought to be ensured. The financial reports should not mislead the investors and ought to provide clear details from the financial position from the company.
Dual Aspect: Based on this theory, all financial transitions have two effects. This is the basis of the accounting equation: Assets = Liabilities + Equity
Assets are owned by a company, and liabilities are the debts of a business, how the company owns to its creditors. Equity is what the company owes to its owners. So all transactions must comply to this equation.
Due to these guidelines of GAAP, consistency within the methods of preparations of monetary accounts from the companies has been maintained. These principles are directly proportional towards the complexity from the accounts of the business and may hence seem complex. The continuing complexity of company transactions have made it required for the accounts sector to have some standardization. GAAPs have not only set the benchmark for standardization, but have also ensured how the general public has a clearer view of the financial stability of a organization.
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