Unlike some fields, there are specific concepts, and rules, that rule the field of accounting. Called the basic accounting principles and guidelines, they form the foundation of accounting rules that accountants must follow to stay in practice. The FASB, or Financial Accounting Standards Board, uses not only the basic account principles and guidelines, but builds upon them with their own standards.
The magic number here is four. There are four basic accounting principles that make up the generally accepted accounting principles (Also known as GAAP, in the US). These are coupled with four accounting theories The GAAP rules dictate how businesses record and report their losses and earnings for that period, and the rules are enforced by the FASB (In conjunction with other government agencies).
Now, do not get us wrong, when you get down to it, accountants are not actually required to follow these rules. However, sticking closely with them means that you are sticking with standards that ensure good, ethical business practices, as well as an understanding and respect for the law. Besides, having a set of guidelines to follow just makes sense.
Below is a list of four basic principles in accounting, and a brief run down on each.
- Accrual Principle
Known as the accrual basis accounting, the principle of this is not to show what it to be done in the future, but what has been completed as of now. Every business is required to report, as well as record, all of its income when it is earned and acknowledged by the business itself.
- Cost Principle
Basically, as businesses are legally obligated to report the actual cost of an asset they received or purchased, not the free market value of the asset itself. This is basically to avoid bias when reporting the amounts, and to ensure that the amount reported is actually the amount the company is out.
- Disclosure Principle
This is a very easy one to guess by the title, the accounting records, all of the records, must be able to be disclosed so that judgment on the company about their financial status can be made without hassle. The only exception to this would be if disclosure would cause the business excessive expenses.
- Matching Principle
This principle is basically so that you can do a real time analysis of the expenses, and income, of the business. This shows where the business is right now, how is it doing financially, and how effective the business practices are at the current moment.