Accounting principles are the general rules and guidelines that companies are required to follow when reporting all accounts and financial data. Maintain and manage your business practices with Debitoor’s online accounting platform to help you stay on top of your financial reporting.
Obviously, if each business organisation conveys its information in its own way, we will have a babel of unusable financial data.
Personal systems of accounting may have worked in the days when most companies were owned by sole proprietors or partners, but they do not anymore, in this era of joint stock companies.
These companies have thousands of stakeholders who have invested millions, and they need a uniform, standardised system of accounting by which companies can be compared on the basis of their performance and value.
Therefore, accounting principles based on certain concepts, convention, and tradition have been evolved by accounting authorities and regulators and are followed internationally.
These principles, which serve as the rules for accounting for financial transactions and preparing financial statements, are known as the “Generally Accepted Accounting Principles,” or GAAP.
The application of the principles by accountants ensures that financial statements are both informative and reliable.
It ensures that common practices and conventions are followed, and that the common rules and procedures are complied with. This observance of accounting principles has helped developed a widely understood grammar and vocabulary for recording financial statements.
However, it should be said that just as there may be variations in the usage of a language by two people living in two continents, there may be minor differences in the application of accounting rules and procedures depending on the accountant.
For example, two accountants may choose two equally correct methods for recording a particular transaction based on their own professional judgement and knowledge.
Accounting principles are accepted as such if they are (1) objective; (2) usable in practical situations; (3) reliable; (4) feasible (they can be applied without incurring high costs); and (5) comprehensible to those with a basic knowledge of finance.