Principles of Accounting

Today in this Accounting Tutorial you will know:

  • Principles of Accounting
  • Revenue Recognition Principle of Accounting
  • Matching Principle of Accounting
  • Cost Principle of Accounting
  • Full Disclosure Principle

Basic accounting rules and guidelines are known as Accounting Principles. There are mainly 4 Accounting Principles:

  • Revenue Recognition Principle: Revenue recognition principle emphasizes that any company recognize revenue in the proper accounting period that means when the revenue is earned then the company should recognize the revenue. In any service providing company revenue is recognized as earned when the service is provided. For example: XYZ Company sold product in the year of 2010 but they received cash in 2011. Revenue recognition principle will allow the company to consider the service as earned in the year of 2010, when the service was actually provided. Under Revenue recognition principle the XYZ Company will record “Account Receivable” as an asset in balance sheet and “Service Revenue” as revenue in the income statement.
  • Matching Principle: Revenue recognition principle states that the company will recognize the revenue in the period when service is provided. Now in order to determine the expense in proper accounting period there is a principle named Matching Principle. The matching principle requires that the expenses which are incurred to earn revenue should also be recognized in the same accounting period when revenue is recognized. For example: The XYZ Company will report that expense in the income statement which was incurred for selling the product on account in 2011 when the revenue was recognized. But the expense could not be paid in the year of revenue recognition. In that case the expense will reported as payable in the balance sheet. The matching principle focus on the matching of the incurred expense with revenue earned.
  • Cost principle: cost principle means the cost should be reported which is paid or received through the assets or services. The cost principle refers that the acquired service and assets should reported in the accounting system with their actual cost no matter if the assets or serviced is obtained many years ago.The amount that is recorded as actual cost of any assets also called historical cost. The historical cost is assumed to represent the fair market value of any assets in that time or period when the transaction was occurs, because the transaction period of any assets can determine the productive use by the users.
  • Full Disclosure Principlethe companies have to follow some general practice and standards of providing information in deciding which information have to report. This information is very important as it influence the users and decision maker of accounting information system in making their decision. This standard or practice of providing or reporting information is referred to as the full disclosure principle. Under the full disclosure principle, companies have to disclose all relevant economic information which will make a difference to the users of accounting information. The companies have to basically disclose regarding three areas of information in their financial report, for example financial statements, notes to financial statements and supplementary information. The financial statements of any company generally comprises of the balance sheet, income statement, statement of cash flows, and statement of owners’ equity. The financial information or any economic event of any company is transferred to the users through the financial statement. To be recognized in the main body of financial statements. The elements of financial statement should be recorded in the financial report by following other principle. Disclosure does not alter proper accounting system. The notes to financial statements generally explicate the items which are reported in the main body of the financial statements. Sometimes the main body of the financial statements is not sufficient for providing the complete view of the performance and position of the company then the notes will give the additional information that are needed to complete the picture. These notes do not to be quantifiable. These Notes can be totally descriptive. For examples descriptions of the accounting policies and procedures that are used for measuring the financial elements reported in the financial statements. And Supplementary information generally consists of those amounts which provide a different perspective from the typical information of financial statements. Supplementary information may be quantifiable information with high relevance and low reliability. For example, oil and gas companies usually give information on confirmed reserves as well as the allied discounted cash flows. Supplementary information may also comprise of the financial information of management’s explanation and its discussion which are related to the importance of that information.