Accounting Concepts and Principles

Accounting plays an important role in operating a business because it helps you record income and expenditures, confirm statutory compliance, and provide investors, management, and government with measurable financial information which can be utilized in making necessary business decisions. The financial records show the outcome of function as well as the financial position of the small businesses or enterprises. In other terms, it helps us to understand the condition of our business in financial matters. This not only cleans and gives updated records to help you keep a record of expenses, gross profit margin, and possible loans, but it also helps to compare the current data with the previous accounting records and allot your budget efficiently.

Accounting Principles

Accounting principles are the instructions that an organization maintains when the financial information of the business is reported. Many basic accounting principles have been established through common practice. They form the origin upon which the complete group of accounting standards has been made. The commonly known principles are the accrual principle, the conservatism principle, the cost principle, etc. These principles are merged into several accounting frameworks, from which accounting standards rule the conduct and reporting of business transactions.

Internationally, the International Accounting Standards Board (IASB) publishes the International Financial Reporting Standards (IFRS). The Financial Accounting Standards Board and IASB occasionally work collectively to publish joint standards on certain important concerns.

Benefits of Accounting Principles

Helps to Plan Ahead

Planning makes it easier for a business to function. Apart from planning the business, it is also important for the business to implement the pre-planned actions to the business at the right time ad situation to gain an advantage in the business. Accounting principles provide a real image of how the business is doing. It shows the accurate revenues earned by the business and predicts the trend of cash flows in the business. This helps the business to keep a record of its financial statements which prevents it to skip necessary information.

Maintain Consistency

Accounting principles help businesses follow the same accounting principles for their accounting periods. This helps in advancing the usage and uniformity of all financial statements. By following the consistency principle, the enterprises make it easier for the users or other parties to evaluate the efficiency of financial information offering greater trust for the users to operate with us.

Reduces Risks and Frauds

Accounting Principles help companies reduce the risk of falsification of data and other frauds in the business. GAAP guidelines guide the investors or stakeholders to follow the reported business finances effectively. GAAP provides the business with the information required to investigate the breaks in issues of collection and capabilities of earnings. It also demonstrates the mistakes that are needed to be looked after for efficient running of the business.

Accounting Concepts

Accounting concepts are the basic rules, assumptions, and conditions that express the limitations and restrictions within which accounting transactions function. In other words, accounting concepts are the generally accepted accounting principles, which create the fundamental base of preparation of universal method of preparing financial statements consistently.

Benefits of Accounting Concepts

• The commonly accepted rules and regulations benefit in achieving uniformity, reliability, and encourages a better understanding of the financial statements.
• It also helps in recording financial transactions at every step to guarantee a more planned, organized, and clear business model. It makes the management take wise financial decisions regarding debts and payments.
• It provides detailed and verified financial data about the asset and the liabilities of the entity and it also provides useful information to help the management of the entity make a commercial decision;
• It gives financial information to the investors and expresses the financial status of the entity and a pure understanding of how each business transaction has been recorded. Provides a financial report of the business which is commonly accepted worldwide and which supports in better understanding of the financial information of the company.

Accounting Policies

Accounting policies are the detailed principles and procedures executed by the management team of the company that is used to prepare the financial statements of the company. These contain any accounting methods, measurement systems, and techniques for presenting disclosures. Accounting policies are important, as they set a procedure, which is followed by all the companies, and provide comparable and reliable financial statements that are standard across years and about other companies.

Difference between Accounting Principles and Policies 

Accounting policies vary from accounting principles as the principles are the accounting rules and the policies are the way a company follows those rules. Policies are the customs, rules, directions, methods that a business agrees with itself. Policies are not accepted worldwide, they can vary from one entity to another. Accounting policy for an organization defines its particular way of accounting the transactions.

For example, a company may plan to charge depreciation on the straight-line method. Some other companies may decide to charge it using the written-down value method. Therefore, different companies are charging their assets using different methods as their policy of charging depreciation.

The rules that the company plans to follow are the accounting principles of the company. Principles are accepted worldwide and are used in all entities uniformly to make different entities comparable and understandable.

For example, all companies have to follow the principle of matching concept. An expense of each entity must be matched with the benefit received from such expenses. A cost cannot be charged in total in the first year but when the benefit of it is received over time. Hence, the assets must be depreciated over time to match the expenses with the benefit received.

Conclusion

The financial records show the outcome of function as well as the financial position of the small businesses or enterprises. In other terms, it helps us to understand the condition of our business in financial matters. Accounting principles are the instructions that an organization maintains when the financial information of the business is reported. Accounting policies are the detailed principles and procedures executed by the management team of the company that is used to prepare the financial statements of the company. These contain any accounting methods, measurement systems, and techniques for presenting disclosures. Accounting policies vary from accounting principles as the principles are the accounting rules and the policies are the way a company follows those rules.