Generally accepted accounting principles (GAAP), are common standards and procedures issued by the Financial Accounting Standards Board (FASB). It encompass the details, complexities, and legalities of business and corporate accounting.
Although there are plenty of guidelines that make up GAAP, these 10 basic principles are the most commonly practiced by any business accountant.
Basic Accounting Principles
1. Economic entity assumption: A business is an entity unto itself and should be treated as such.Billie, Anne Grigg “A Guide to Understanding the 10 Fundamental Accounting Principles.” 16 March 2020
2. Monetary unit assumption: All financial transactions should be recorded in the same currency.
3. Specific time period assumption: Financial reports should show results over a distinct period of time.
4. Cost principle: The cost of an item doesn’t change in financial reporting.
5. Full disclosure principle: All information that relates to the function of a business’s financial statements must be disclosed in notes accompanying the statements.
6. Going concern principle: A business will continue to exist and function with no defined end date.
7. Matching principle: Businesses should use the accrual basis of accounting and report all financial information using this method.
8. Revenue recognition principle: Revenue is reported when it’s earned, regardless of when payment is actually received.
9. Materiality principle: When an accountant finds a transactional error, they can use their professional judgment to determine if the error is immaterial to the business.
10. Conservatism principle: When there is more than one acceptable way to record a transaction, expenses and liabilities should be recorded as soon as possible, and revenues and gains should only be recorded when they occur.
Keep in mind!
Understanding these 10 basic accounting principles will give you a better insight into your business’s financial processes. Having the basic knowledge of these accounting principles will make communicating with your accountant much more efficient.
If you’re a business owner with an accountant, chances are that they are following this meticulous and rigid process. However, know that they are doing this for both the protection of your business and to keep in line with business regulations.
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