There are several basic accounting principles of basic accounting which are the Historical cost principle, Conservatism principle, the Principle of Objectivity, and the Principle of Full disclosure. The principles are used to measure the cost and revenue of a business. The costs and revenues should be reasonable and based on data, not on personal assumptions. All accounts should be set up properly, including the cash income and expense accounts. The costs and revenues should be connected by number and time to form a comprehensive financial statement.
Conservatism principle of Basic Accounting
Conservatism principle is a basic accounting principle which aims to ensure that the Financial Statements contain accurate and reliable information. According to this principle, losses and gains should be recorded when they are realized rather than when they are merely anticipated. This principle can result in a downward bias in the value of assets and revenue, but the intention is to ensure that these numbers are not inflated.
According to the conservatism principle, the value of assets and liabilities should be recorded at the lower of their acquisition costs or their current market value. This principle is useful when a business experiences fluctuations in demand for its products or services. It also ensures that revenues are properly recognized when they are not certain.
Using the conservatism principle allows for more transparent financial reporting and a realistic future trajectory. It is one of the Generally Accepted Accounting Principles that was introduced to ensure that financial reporting is as accurate as possible. Companies that use conservatism accounting methods may be able to realize more profits because they do not overstate their costs.
The conservatism principle helps businesses make financial statements that are more accurate by restricting understating assets and liabilities. This principle protects investors by helping businesses report their revenues and assets accurately and clearly. It also helps companies record revenues and expenses in the same accounting period and limits understatement. However, it should be noted that conservatism does not mean that an accountant is obligated to be conservative. Instead, it should be understood as the way in which companies should prepare their financial statements.
Although conservatism is an important accounting principle, it is not the only principle. The conservatism principle is used in inventory valuation and in estimating uncollectible accounts receivables and casualty losses. This principle is also used for estimating future gains and losses. As with any principle, it has its advantages and disadvantages.
Historical cost principle
The historical cost principle is an accounting principle that is used to measure the original cost of assets. As the value of an asset depreciates over time, it is important to record the cost at which it was purchased. This principle helps businesses account for all assets and liabilities at their original cost.
The historical cost principle is generally applied to assets such as land or buildings. It does not apply to stocks and bonds. However, it is used to record assets such as computers, vehicles, land, and buildings. The Financial Accounting Standards Board has set standards for the historical cost principle that apply to international companies.
The historical cost principle dictates that a business must record the original cost of an asset at the time of purchase. It does not account for inflation or changes in the market. The basic principle also forms the basis for the ongoing trade-off between usefulness and reliability of an asset. This principle is a fundamental principle of business bookkeeping.
The historical cost principle is an important bookkeeping principle that helps to improve the accuracy of business finance and accounting. This principle dictates that the original cost of an asset should be recorded on the balance sheet. It also provides information on the value of an asset based on its cost at the time of purchase. Using the historical cost principle, companies can accurately estimate the value of their assets and liabilities.
Another important aspect of this principle is that it requires assets and liabilities to be recorded at their original cost. Therefore, if an asset costs $50,000 and you make a down payment of two hundred thousand dollars, it should be recorded at that amount. Moreover, equity investments should also be recorded at their original cost.
Objectivity principle
If you’ve ever wondered what the Objectivity Principle is, then you’ve probably come across it in the context of the financial statement. For example, a company wants to acquire financing to purchase additional machinery and needs to provide a copy of its financial statements to a bank. An income statement prints out by a bookkeeper from the accounting system of company and then sends to the bank through an E-mail. This practice violates Objectivity Principle, which states that numbers and accounts must be kept separate from the business.
A company’s financial statements must be accurate, transparent, and backed up by solid evidence. However, executives and auditors at Enron relied heavily on their opinions to value assets. Furthermore, the auditors were under pressure to ensure that they could retain their multi-million dollar contract with the company.
As a result, the Objectivity Principle requires that accounting entries be based on factual and verifiable information. In other words, they must be based on facts, not on the accountant’s interpretation of what those facts mean. Accounting rules are based on these principles, and they can frustrate some business owners, but they are necessary to ensure the accuracy of financial statements.
Objectivity is closely related to reliability. The objectiveness principle states that the information contained in an accounting document should be based on factual evidence, and that it should be reliable and verifiable if prepared by a different accountant. The application of this principle in accounting is often shown in the reporting of asset values. For example, if five experts in commercial real estate evaluate the same property, they will each give different opinions. It doesn’t matter which is the most reliable opinion, as long as it’s based on fact.
If company owner prepare the financial statements of the company through his accountant, they should ask the accountant to provide him with all the relevant invoices and bills for verifying all transactions. However, if the owner of the company is not willing to provide the information, then they are violating the Objectivity principle. Objectivity principle is fundamental in the whole accounting process.
Full disclosure principle
The Full Disclosure Principle is a fundamental principle of accounting that promotes the creation of accurate financial statements. Accurate financial statements are necessary to facilitate audits and timely tax filings. Moreover, full disclosure promotes the confidence of stakeholders and the ordinary public in an organization. This is beneficial for the economy as a whole as well as for the country.
Under this principle, management must disclose all relevant financial information to the outside world. This includes non-monetary financial information about the amount and timing of future events. Moreover, it should also include information on the level of inventories, the relationship between related parties and the impairment of goodwill. By following the principle, the financial information of an organisation will be transparent and easy to understand.
The Full Disclosure Principle was first formulated as a means to ensure that potential investors and executives are provided with all the necessary information. It helps create transparency in the financial markets and limits the scope of fraudulent activities. In the past few decades, its importance has increased after high-profile scandals like the Enron fiasco and the Madoff Ponzi scheme.
The Full Disclosure Principle also applies to insider trading. In the same way, an insider who makes insider trades must disclose this information to prevent investors from being misled. For example, if a company purchased a piece of property and a pedestrian tripped on it, the company should disclose this information in its annual reports.
Similarly, the Full Disclosure Principle applies to contingent liabilities. It requires the disclosure of these liabilities in the Financial Statements in order to make it easy. For users to understand the current contingent liabilities of the entity. However, in a company’s financial statements, it is not sufficient to disclose all contingent liabilities. Unless it relates to the materiality of the liabilities.
