What is Accounting? What are its Key Principles?

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What is Accounting?

Accounting refers to the systematized and comprehensive recording of all the financial transactions relating to a business. Accounting involves the process of briefing, examining and reporting these transactions.

What is Financial Accounting?

Financial Accounting is the process of recording, summarizing and reporting the innumerable transactions as an outcome from the various business operations over a particular period of time. These transactions are shortened for the preparation of financial statements including balance sheet, income statement and cash flow statement, that records the operating performance of the company over a particular time period.

What are Accounting Principles?

Accounting principles are the basic directions and plans that must be followed by organizations while reporting financial information. Accounting principles help in leading the accounting world according to the general instructions and perceptions. These actually form the foundation for the more complex, comprehensive and legalistic rules of accounting.  

Take a look at some of the basic principles of accounting.

1. Accrual Principle

According to this concept, the accounting transactions must be recorded in the accounting periods, that is when they actually happen, rather than in the periods when there are cash flows related to them. This is the groundwork for the accrual basis of accounting. This is very important for the preparation of the financial statements that illustrate what actually happened in the accounting period.

2. Conservatism Principle

This concept says that you must record all the expenses and liabilities at the earliest, but record revenues and assets only on their occurrence. A conservative slant is introduced to the financial reports that generate lower reported gains. On the contrary, the principle also encourages the maintenance of losses.

3. Cost Principle

This concept says that a business must only record its possessions, obligations and equity investments at their actual purchase costs. This principle is becoming less valid, as a host of accounting standards are heading in the direction of adjusting assets and liabilities to their fair values.

4. Full-Disclosure Principle

According to this concept, you must involve all the business related information that has an impact on the readers in the financial statements of the organization. The accounting standards have highly augmented this concept in specifying a large number of informational disclosures.

5. Going Concern Principle

This concept says that an organization will stay in functioning for a predictable future. This clearly means that you would be justified in conceding the identification of some expenses such as depreciation until later periods.

6. Materiality Principle

This principle says that you should record a transaction in the accounting statements. and not doing so might alter the process of decision making of the people reading the organization’s financial statements.

7. Revenue Recognition Principle

According to this concept, you must only recognize the revenue when the business has extensively completed the earning process.

8. Time Period Principle

This concept explains that a business must report the outcomes of its procedures over a standard time period. This may be practiced as the most patently obvious of all the accounting principles, but it is anticipated to develop a standard set of comparable periods, that is helpful for trend analysis.