These Accounting principles re generally accepted accounting standards followed harmoniously across the world. All stakeholders that have interest in financial statement of a company like owners, shareholders, bank, and other related parties like creditors ,across the globe want a coherent way of preparing financial statements in order to understand financial statements with clarity by avoiding complexity due to changing local policies to prepare financial statement. Concepts of these accounting principals are understood, agreed and followed all parties unanimously. Every organization and audit firms are bound to follow and apply the generally accepted accounting principals to ensure consistency in financial reporting matters.
Guidelines given by these accounting principals are to record each class of financial statement with the same concept all over the world. At the same times, these accounting principles are flexible enough to accommodate traditional or local practices to record transactions as per the local benchmark as well. These accounting principals adhere to both national and internal needs. Following are the accounting principals devised as Generally Accepted Accounting Principals.
All business transactions are recorded with respect to the business and not to its owner. Owners’ personal transactions are taken separately as from the business transactions. There is a veil of incorporation between the owner and business.
According to this accounting principle, transactions having monetary value are recorded in financial statements. So only those transactions that can be recorded in terms of U.S dollars are recorded in financial statement as per American accounting principles.
Every activity recorded in financial statements must be shown in terms of the time period from starting date till the date of ending. It may be the date when accounting period starts and ends. Financial statements will be matched and compared as per the time period.
The basis of preparation of financial statements should show the future stainability of the business. The aim is to show that company is going to exist for foreseeable future .In case it is going to be closed; the accountant should disclose the disposable values of the asset not the carrying value.
The value of the assets recorded in balance sheet should be the historical cost basis i-e the cost at which asset was purchased originally. Adjustment for accumulated depreciation should be made on annual basis as per the applicable depreciation policy.
Every item of financial statements should be described with respect to all important matters enough for the users of financial statements to make understanding. Notes to the accounts should be used at the end of financial statements.
This accounting principle describes the ways in which profit figure will be calculated by deducting expenses from the revenue. As per this rule, revenue should be matched with the expenses of same period not the previous period. Commission paid on sales is an expense that would be matched with the sales of same quarter or year.
As per basis accrual of accounting and revenue should be recorded when sale is made not when the cash is received. Most of organizations prepare their accounts on accrual basis.