What are the Principles of Accounting?
The principles of accounting are a set of rules and regulations that should be followed for the correct accounting of assets and other economic and financial elements of the company, in this way reflecting a faithful perspective of the activity that it carries out.
They are called “Generally Accepted Accounting Principles” and they establish a guide for action with concrete and conventional meaning. It can be said that in a certain way they constitute a systematized and regulatory law for the accountant.
Ultimately, these accounting principles regulate the financial accounting process, establishing the information that must be included and the way to organize and present it in the financial statements. These principles reflect the objectives and basic characteristics of financial accounting. Accounting principles
There are universal principles, however, they are usually ruled by the association of accountants in each country, finally seeking the objectivity of the financial information reflected in the financial statements.
This is the basic postulate that should guide the accountant’s action at all times.
It is synonymous with impartiality, it represents the orientation guide linked to ethics and justice, referring to the fact that accounting information must be prepared with fairness to third parties and for the company itself, without favoring anyone in particular.
Under the principle of equity, opposing interests are made compatible, without conflicts with the particular interests of those who use this accounting data.
They are those accounting principles that identify and delimit the economic entity and all its financial elements.
The concept of ” entity ” is established to refer to the financial statements, leaving the owner as a subjective element or as a third party.
The economic activity is carried out by identifiable entities made up of capital, human resources, and natural resources, coordinated by a board of directors that makes decisions focused on the achievement of the entity’s objectives.
The entity is identified based on criteria such as the set of resources with structure and operation destined to satisfy a certain need of society and, on the other hand, as the center of autonomous decisions regarding specific achievements.
Being clear that the personality of a certain business is independent of the personality of its shareholders or owners. Therefore, its financial statements only include assets, obligations, and rights of the economic entity.
The financial statements include economic assets, that is, tangible and intangible assets with an economic value that can be valued in monetary terms.
Any asset susceptible to exchange value is recorded in books, regardless of how it was obtained. Example: tangible goods (merchandise, raw material, machine, inputs) and intangible goods (patents, insurance, client portfolio, projects)
This accounting principle reflects the valued equity in prices to reduce the components to an expression that allows them to be grouped and compared. Generally used as an account currency, the currency unit of legal tender in the country within which the entity operates.
The entity is presumed in full force and projection also known as business continuity is based on the idea that the company will continue operating indefinitely unless otherwise specified, due to significant adverse situations, continuous economic losses, and insolvency.
When the figures constitute appreciated liquidation values, they must be specified and will be accepted when the entity is in liquidation.
Valuation at Cost
Determine the need to value assets, the cost of production or acquisition. Without allowing currency fluctuations to alter this process.
It is the main valuation criterion that conditions the formulation of financial position statements. Without ignoring the coexistence of other criteria and rules applicable in explicit circumstances.
In the application of this accounting principle, expenses and income are recorded in the referred period even though the supporting document was dated the following year. Accrue expressly recognize and record accounting events (interest on loans, remunerations due to pending payment, depreciation of assets, royalties) in accounts at a certain date.
It considers the equity variations that fall within a fiscal year without considering whether they have been paid.
The companies in progress need to measure the results of the management taking into account the passage of time, for administrative, legal, and fiscal purposes or the simple fulfillment of commitments.
Changes in liabilities, assets and the accounting expression of equity must be recognized in the accounting records, measured objectively, and expressed in account currency.
The economic results must be computed after being carried out, that is to say when the operation that originates them is perfected by the applicable legislation or commercial practices and the risks inherent to the said operation have also been considered.
When choosing between two values for an active element, either the lower must be chosen, or it must be accounted for in such a way that the aliquot is lower. This principle can also be expressed by saying: “Account for losses when they are known and gains only when they have been realized.”
The general principles and particular standards used to prepare the financial statements of a given entity should be applied uniformly from one year to the next.
The principle of uniformity implies that once the application of a standard has been decided, future operations should be treated in the same way, so as not to alter the items in the financial statements, making it difficult to compare the different periods.
Significance and relative importance
In weighing the application of accounting principles and standards, a practical sense should be established. No line sets the limits of what is significant. The best criteria must be used to resolve what corresponds in each case and accordance with the circumstances. This principle refers to the flexibility that must exist to admit measurements that do not respond to what is prescribed by the accounting discipline.
The financial statements must contain the basic and additional information and discrimination necessary for the proper interpretation of the financial scenario and the economic results. This criterion implies formulating the reports in a way that is understandable to users.