There are four basic accounting principles that, together with four basic accounting assumptions and four basic accounting constraints, are generally accepted accounting principles or GAAP in the United States. GAAP is the accounting rules under which businesses record and report financial results and losses during the accounting period. These rules are issued by the Financial Accounting Standard Board, usually with other governmental bodies. Accountants are not necessarily obliged to follow the rules, but the rules must be followed as closely as possible, as they lay down rules that must be met to ensure the proper accounting, clarity and comparability of accounting data. Below are the four basic accounting principles and a brief explanation of each
1. The Cost Principle
Businesses are required to record and report assets on the basis of actual costs incurred in obtaining them rather than the free market value of the assets acquired. The basis for this principle is that this recording and reporting method is reliable and reduces opportunities such as biased market values that interfere with accounting. However, this method can be considered irrelevant as it relates to the actual value of the asset.
Principle of accrual accounting
Businesses must keep a record and report revenue at the time it is acquired and realized by the business, not when the cash of the proceeds is received by the business. This method is called accrual accounting. The purpose of this principle is to actually show what kind of job it has done and not in the future.
3rd The Principle of Compatibility
This principle allows real-time analysis of costs and revenue. With this principle, you can show how successful your business was financially and efficiently. As in the case of accrual accounting, expenditure in this case can only be recorded and accounted for when revenue related to such expenditure has been obtained
. Disclosure principle
An enterprise's accounting records must be disclosed in order to make the decision on the financial position of an enterprise easily accomplished. However, disclosure of accounting and financial information should not result in unjustified costs or misrepresentation.
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