Accounting is a very exact and regulated financial practice. There are consequently certain accounting concepts and principles that act as standardising guidelines throughout this profession. Here we provide some important information about these concepts and principles.
Generally Accepted Accounting Principles (GAAP)
GAAP stands for Generally Accepted Accounting Principles. This refers to the internationally used framework of accounting concepts, practices, conventions and rules that are observed by accountants when recording and preparing financial documents. Here are some examples:
- The Business Entity Concept: Every business should be regarded as its own accounting entity.
- The Time Period Principle: To help account for business’ performances, financial statements should be prepared at certain intervals (quarterly, half-yearly, or annually). These then becomes known as the company’s financial periods.
- The Consistency Concept: An accountant must use the same accounting methods and procedures from one financial period to the next. This prevents people from manipulating financial statements through the use of different methods.
- The Conservatism Principle: Accountants should do their work in a way that neither understates nor overstates the affairs of a business. For example: an accountant should never take potential future gains into consideration.
- The Objectivity Principle: Financial data mustbe recorded on the basis of objective evidence. The use of source documentation is consequently essential.
- Accrual Concept: Revenue should be recorded in the period it is earned, even if the cash is not received at that time. Expenses should also be recorded when they are incurred, regardless of when the money is actually transferred.
- Materiality Concept: Business transactions that can influence the decisions of the users of financial statements are deemed material and must thus be properly reported within a certain time.
- The Monetary Assumption: In accounting, you can only communicate in terms of monetary units. Only transactions which can be expressed in monetary units can thus be recorded by an accountant.
- The Matching Principle: Each expense item related to revenue must be matched with the relevant revenue earning in the same period. This ensures that operational results can be measured fairly.
There are many more Generally Accepted Accounting Principles. Anyone with an accounting job will be more than familiar with these.
It should also be noted that each of these principles or concepts is much more complicated than stated above. Each concept or principle has a whole set of technical rules, exceptions and areas of application.
Learning the rules of accounting
Following the rules of accounting ensures that your books are organised, systemised and legible to other professionals. Without universal rules, principles, concepts and practices, the whole purpose of accounting would be lost.
Following accounting rules can also become necessary from a legal point of view. In South Africa, as well as internationally, companies need to adhere to certain financial regulations and guidelines. This often comes into play when a company is being audited.
The Learning Group offers a range of certified accounting courses that you can take to learn all the rules, principles, concepts and practices of accounting. Follow the link to find out more: accounting courses.