The guidelines and rules which must be followed by companies when they report their financial data are referred to as accounting rules and principles. A set of standardized principles of accounting is issued by the Financial Accounting Standards Board (FASB) in America. This standardized set of accounting rules and principles is known as generally accepted accounting principles (GAAP). Lets find out the Meaning of Accounting Principles here.
Understanding Accounting Principles
The purpose and the end goal of all principles of accounting are making sure that the financial statements of a company are complete, are consistent, and are comparable. When this is achieved, investors find it extremely easy to use the financial statements of the company to glean valuable information and analyze it to understand how the company is doing and where it seems to be heading.
Generally Accepted Accounting Principles (GAAP)
In the United States of America, for publicly traded companies, it is mandatory that they regularly file their financial statements of the company and these statements must be GAAP compliant. Only when companies do so they are allowed to stay listed publically on the various stock exchanges. The publicly traded companies’ Chief Officers along with the independent auditors need to certify that the company’s financial statements along with the related notes have been made according to GAAP and are GAAP compliant.
There are several principles that are used in accounting of which the following ones are the most fundamental principles.
- Time period principle
- Revenue recognition principle
- Reliability principle
- Monetary unit principle
- Materiality principle
- Matching principle
- Going concern principle
- Full disclosure principle
- Economic entity principle
- Cost principle
- Consistency principle
- Conservatism principle
- Accrual principle
The principles of accounting aid in governing the accounting world based on general guidelines and rules. They also help answer some frequently asked questions such as “what is debit note and credit note?” and “how do I start bookkeeping?” With the help of GAAP, an attempt has been made to have a regulated and standardized set of methods, assumptions and definitions that are associated with accounting.
Golden Rules of Accounting
These refer to those essential regulations which are used while monitoring a business’s day-to-day recording of financial transactions. There are 3 Golden Rules of Accounts. Together, the three rules provide the basis for the passing of journal entries and in turn, this goes to form the basis of bookkeeping and accounting.
In accounting, there are three types of accounts that are to be maintained. These are Personal Account, Real Account and Nominal Account.
A personal account is a creditor account. It is a general ledger account to all persons such as associations, firms, and individuals.
A Real Account: general ledger that relates to Assets and Liabilities.
A Nominal Account: general ledger account associate with all income, expenditure, gain and loss.
There is a set of rules for managing each of these accounts. These sets of rules are referred to as the Golden Rules.
These golden rules are:
Personal Account – debit is what comes in and credit is what goes out
Real Account – debit – the receiver, credit – the giver
Nominal Account – Debit – all expenditure or losses of a business, Credit – all incomes or gains of a business.