ACCOUNTING

PRINCIPLES
RONAK SHARMA XI-B
What Are the Basic Accounting
Principles?

Some of the most fundamental accounting principles include the following:

 Accrual principle
 Conservatism principle
 Consistency principle
 Cost principle
 Economic entity principle
 Full disclosure principle
 Going concern principle
 Matching principle
 Materiality principle
 Monetary unit principle
 Reliability principle
 Revenue recognition principle
 Time period principle

 The most notable principles include the revenue recognition principle, matching principle,
materiality principle, and consistency principle. Completeness is ensured by the materiality
principle, as all material transactions should be accounted for in the financial statements.
Consistency refers to a company’s use of accounting principles over time.
Generally Accepted Accounting Principles (GAAP)

 Generally accepted accounting principles (GAAP) are uniform accounting principles for
private companies and nonprofits in the U.S. These principles are largely set by the
Financial Accounting Standards Board (FASB), an independent nonprofit organization whose
members are chosen by the Financial Accounting Foundation.

 A similar organization, the Governmental Accounting Standards Board (GASB), is responsible

for setting the GAAP standards for local and state governments.

 And a third body, the Federal Accounting Standards Advisory Board (FASAB), publishes the
accounting principles for federal agencies.

 Although privately held companies are not required to abide by GAAP, publicly traded
companies must file GAAP-compliant financial statements to be listed on a stock exchange.
Chief officers of publicly traded companies and their independent auditors must certify that
the financial statements and related notes were prepared in accordance with GAAP.
International Financial Reporting Standards (IFRS)

 The International Accounting Standards Board (IASB) issues International

Financial Reporting Standards (IFRS). These standards are used in more than
120 countries, including those in the European Union (EU).

 The Securities and Exchange Commission (SEC), the U.S. government agency
responsible for protecting investors and maintaining order in the securities
markets, has expressed interest in transitioning to IFRS. However, because
of the differences between the two standards, the U.S. is unlikely to switch
in the foreseeable future.

 However, the FASB and the IASB continue to work together to issue similar
regulations on certain topics as accounting issues arise. For example, in
2014, the FASB and the IASB jointly announced new revenue recognition
standards.
Who sets accounting principles and standards?

 Various bodies are responsible for setting

accounting standards. In the United States,
generally accepted accounting principles
(GAAP) are regulated by the Financial
Accounting Standards Board (FASB). In Europe
and elsewhere, International Financial
Reporting Standards (IFRS) are established by
the International Accounting Standards Board
(IASB).
How does IFRS differ from GAAP?

 IFRS is a standards-based approach that is used

internationally, while GAAP is a rules-based system
used primarily in the U.S. IFRS is seen as a more
dynamic platform that is regularly being revised in
response to an ever-changing financial environment,
while GAAP is more static.

 Several methodological differences exist between the

two systems. For instance, GAAP allows companies to
use either first in, first out (FIFO) or last in, first out
(LIFO) as an inventory cost method. LIFO, however, is
banned under IFRS.
When were accounting principles first set forth?

 Standardized accounting principles date all the way back to

the advent of double-entry bookkeeping in the 15th and
16th centuries, which introduced a T-ledger with matched
the rise of commerce and capitalism. What would become
the American Institute of Certified Publicentries for assets
and liabilities. Some scholars have argued that the advent of
double-entry accounting practices during that time provided
a springboard for Accountants (AICPA) and the New York
Stock Exchange (NYSE) attempted to launch the first
accounting standards to be used by firms in the United
States in the 1930s.
What are some critiques of accounting principles?

 Critics of principles-based accounting systems say

they can give companies far too much freedom and
do not prescribe transparency. They believe because
companies do not have to follow specific rules that
have been set out, their reporting may provide an
inaccurate picture of their financial health. In the
case of rules-based methods like GAAP, complex
rules can cause unnecessary complications in the
preparation of financial statements. These critics
claim having strict rules means that companies must
spend an unfair amount of their resources to comply
with industry standards.
 The Bottom Line

 Accounting principles are rules and guidelines that

companies must abide by when reporting financial data.
Whether it’s GAAP in the U.S. or IFRS elsewhere, the
overarching goal of these principles is to boost
transparency and basically make it easier for investors to
compare the financial statements of different companies.

 Without these rules and standards, publicly traded

companies would likely present their financial information
in a way that inflates their numbers and makes their
trading performance look better than it actually was. If
companies were able to pick and choose what information
to disclose and how, it would be a nightmare for investors.