The accounting principles are shown and explained, in a concrete and didactic way that will allow, through a series of examples, a much easier understanding by the reader.
Table of Contents
A principle says that every financial statement must reflect the equity between opposing interests, which are at stake in a given company or entity.
The financial statements always refer to an entity where the owner is considered a third party.
3. Economic Goods
The principle establishes that economic goods are material and immaterial goods that value monetary terms.
On the side of material goods, it would be a company’s machinery, which is the value at its acquisition price.
4. Common Currency
A principle establishes to record the financial statements. There must be a common currency, which is generally the country’s legal currency in which the entity operates.
5. Business in Progress
The principle by which it is assumed that the company to which its financial activities are registered has temporary operation validity with projection into the future unless there is good evidence.
Suppose another construction company that has a 6-month construction job wants to ally itself with the first one because of the machines it owns. In that case, it can do so since the two-year validity of the contract that the 1st company has fully observed.
It is also known by the name of the period. This principle refers to the fact that the management results are measure in the same time intervals so that the results between fiscal year and fiscal year are comparable.
Changes in assets, liabilities and equity should be objectively (properly) measure and record in the accounting records following all principles, as soon as possible.
Also known as the principle of conservatism. This principle says that the economic events to be record should not be underestimate or overestimate. When accounting, the lowest value for the asset is always chosen.
The Principles are Classified Into Four Areas
Area 1. Principle: equity: The focus of equity is in area 1 because it is the general and fundamental principle for the other directions.
Area 2. Principles: entity
Economic assets, common currency, going concerned, exercise.
These five principles are in area 2 because they reflect the socioeconomic environment. In other words, these principles refer to everything that has to do with the company and the economic and social environment.
Area 3. Principles: objectivity, prudence, uniformity, exposure and materiality.
These principles relate to information since they relate to the collection, measurement, exposure, and way the information is taken.
Area 4. Principles: valuation at cost, accrual, realization.
These principles are characterize by referring to the valuation; therefore, it corresponds to everything related to payment commitments, collection and ass
The changes in equity that must be consider to establish the financial result correspond to a financial year without distinguishing whether they have been receive or paid during the said period.
Changes in assets, liabilities and the accounting expression of net worth must be formally recognize in the accounting records as soon as it is possible to measure them and objectively express this measure in monetary terms.
The financial results are record when they are carried out. The operation that originates them is perfect from the point of view of the applicable legislation or commercial practices, and risks inherent to the said operation have been fundamentally weight.
It will be establish as a general character that the concept “realize” participates in the idea of “accrue”.
It means that when you have to choose between two values for an asset item, you should generally select the lower one, or else a transaction is account for so that the owner’s share is more lacking.
This general principle can also be express by saying: “account for all losses when known and gains only when realized”.
The general principles, when applicable, and the particular standards – valuation principles – use to formulate the financial statements of a given entity must be apply uniformly from one fiscal year to another.
Significance Of Relative Importance
When weighing the correct application of the general principles and the particular norms, it is necessary to act with a practical sense. Frequently some situations do not fit within those and that, however, do not present problems because the effect they produce does not distort the general picture.
Of course, no demarcation line sets the limits of what is and is not significant; consequently. According to the circumstances, the best criterion must be apply to resolve what corresponds in each case, taking into account factors such as the relative effect on assets, liabilities, equity or results of operations.
Qualities of Accounting Principles
What accounting principles define them and differentiate them by possessing certain qualities? These are:
- Its origin is in the harmonization of financial accounting.
- The practice adopts its character of a basic foundation.
- It habitually allows it to be classified as a generally accepted principle.
- Its simplicity, clarity, and generality explain and reflect basic accounting practices.
- link with attempts to formalize accounting, which suppose a high degree of rationality.
- Its usefulness, to the extent that it is orient towards specific purposes and objectives.
The financial statements must contain all the information and basic and additional discrimination essential for an adequate interpretation of the economic situation and the entity’s financial results.