The Importance of Accounting Principles
The purpose of accounting is to communicate relevant, material, and reliable information about a company to its users. Its users can be either internal or external. Internal users require the financial statements to make strategic planning decisions. External users rely on the financial statements to make decisions. Here are some examples of the types of users that depend on accounting information: accountants, lenders, customers, and other stakeholders. Listed below are some of the most important principles in accounting.
Objectivity principle: A person performing accounting work must be free from any bias or ill-intention. They should state facts and figures in a neutral and non-partisan manner. In addition, supporting documents must be provided for the entries. It is not possible to verify every entry in an accounting book. Therefore, the purpose of accounting is to avoid personal bias in a business and its finances. While this principle is important in accounting, it should not be ignored entirely.
Monetary unit principle: This principle prohibits excessive estimating of values. It also ensures that the initial value of a monetary unit or currency is reflected, and any changes in the value of a monetary unit or currency must be recorded accordingly. Aside from this, the objective principle states that an entity should give its stakeholders relevant financial and operational information, and that the necessary steps should be taken to provide this information to interested parties on a regular basis.
The conservatism principle: This principle teaches a company to record losses as soon as possible. This principle can sometimes be over-emphasized, so it is best to follow it only if it helps the organization’s financial position. In other words, the purpose of conservatism is to prevent a company from being too conservative by recording losses sooner than necessary. In other words, companies should not record any losses until the event is certain. But that is not to say that a business should not keep track of any expenses or profits, but rather, they should use them appropriately.
A third principle is the disclosure principle. This principle makes sure that the information is presented in a fair and accurate way. While it doesn’t matter if the information is purely financial, it is still important to disclose the reason why a particular transaction exists. A company should not hide it from its shareholders. A new law or regulation may affect a company’s business, and a new policy can adversely affect the business. By demonstrating its financial position, this principle will demonstrate that it’s not being too risky.
Another principle of accounting is the cost concept. This principle explains the monetary value of objects. An asset must be purchased at its original cost. This includes all the expenditures that are required to make it ready for use. The price is equal to its original price and the costs of acquisition. The cost concept is a key component in accounting. If a product is sold, its cost must be recorded as the purchase price. In the case of an asset, it will be worth the same amount as its replacement value, if the asset has been used once.