Question

What are the connections between accounting principles and their specific practical applications?

Answer 1

Accounting principles are the general rules and guidelines that companies are required to follow when reporting all accounts and financial data.

Whilst there is currently no universally standardised accepted accounting principles, there are various accounting frameworks which set the standard body. The most common accounting principle frameworks used are IFRS, UK GAAP, and US GAAP. There are both similarities and differences between these three frameworks, where GAAP is more rule-based whilst IFRS is more principle based.

Specific practical applications:

There are some of the main accounting principles and guidelines, listed under US GAAP:

1. Conservatism principle - In situations where there are two acceptable solutions for reporting an item, the accountant should ‘play it safe’ by choose the less favourable outcome. This concept allows accountants to anticipate future losses, rather than future gains.
2. Consistency principle - The consistency principle states that once you decide on an accounting method or principle to use in your business, you need to stick with and follow this method throughout your accounting periods.
3. Cost principle - A business should record their assets, liabilities and equity at the original cost at which they were bought or sold. The real value may change over time (e.g. depreciation of assets/inflation) but this is not reflected for reporting purposes.
4. Economic entity principle - The transactions of a business should be kept and treated separately to that of its owners and other businesses.
5. Full disclosure principle - Any important information that may impact the reader’s understanding of a business’s financial statements should be disclosed or included alongside to the statement.
6. Going concern principle - The concept that assumes a business will continue to exist and operate in the foreseeable future, and not liquidate. This allows a business to defer some prepaid expenses (accrued) to future accounting periods, rather than recognise them all at once.