The Basic Principles
Principles derive from tradition, such as the concept of matching. In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP.
- Principle of regularity: Regularity can be defined as conformity to enforced rules and laws.
- Principle of consistency: This principle states that when a business has once fixed a method for the accounting treatment of an item, it will enter in exactly the same way all similar items that follow.
- Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status.
- Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company.
- Materiality concept: An item is considered material if its omission or misstatement will affect the decision making process of the users. Materiality depends on the nature and size of the item. Only items material in amount or in their nature will affect the true and fair view given by a set of accounts.
An error that is too trivial to affect anyone’s understanding of the accounts is referred to as immaterial. In preparing accounts it is important to assess what is material and what is not, so that time and money are not wasted in the pursuit of excessive detail.
- Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, revenue with an expense, etc. (see convention of conservatism)
- Principle of prudence: This principle aims at showing the reality "as is": one should not try to make things look prettier than they are. Typically, revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable.
- Principle of continuity: When stating financial information, one should assume that the business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value (see depreciation and going concern).
- Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not counted for entirely on the date of the transaction.
- Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records.
- Principle of Utmost Good Faith: All the information regarding to the firm should be disclosed to the insurer before the insurance policy is taken.
Read more about this topic: Generally Accepted Accounting Principles, US GAAP
Famous quotes containing the words basic and/or principles:
“The basic difference between classical music and jazz is that in the former the music is always greater than its performanceBeethovens Violin Concerto, for instance, is always greater than its performancewhereas the way jazz is performed is always more important than what is being performed.”
—André Previn (b. 1929)
“In child rearing it would unquestionably be easier if a child were to do something because we say so. The authoritarian method does expedite things, but it does not produce independent functioning. If a child has not mastered the underlying principles of human interactions and merely conforms out of coercion or conditioning, he has no tools to use, no resources to apply in the next situation that confronts him.”
—Elaine Heffner (20th century)