Principles Of Accounting Flashcards, test questions and answers
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What is Principles Of Accounting?
Accounting principles are the building blocks of the discipline of accounting, providing a framework for how businesses record and report financial transactions. From simple bookkeeping systems to complex financial reporting standards, these principles provide guidance for accountants as they work to accurately interpret and analyze a company’s financial data.The Generally Accepted Accounting Principles (GAAP) are the most widely accepted set of accounting principles in the United States. They are derived from four primary sources: accounting conventions, business ethics, legal requirements, and government regulations. The GAAP is updated regularly to ensure its accuracy and relevance in today’s ever-changing business environment. These updates also reflect changes in technology that can affect how companies manage their finances.The primary purpose of accounting is to help businesses make better decisions by providing accurate information about their financial performance over time. To achieve this goal, accountants must adhere to certain basic principles such as consistency and accuracy when recording transactions; objectivity when evaluating assets, liabilities, income and expenses; relevance when selecting relevant information; timeliness when preparing timely financial statements; comparability when comparing numbers across different periods or organizations; verifiability when verifying data with external sources; disclosure of all necessary information about a transaction or event; materiality when determining what should be disclosed or reported on an entity’s financial statements; prudence when recognizing losses earlier than gains or deferring income until realized; matching principle which requires expenses to be matched with revenues associated with them during a particular period of time (accrual basis); cost principle which requires assets acquired through business activities should be recorded at their original cost at the time they were acquired (historical cost); going concern assumption which means that an entity will continue operations indefinitely unless there is evidence that indicates otherwise (going concern principle); economic entity assumption which states that only transactions related to a particular economic entity should be included in its accounts (entity concept). These accounting principles help ensure companies maintain accurate records that accurately reflect their current state of affairs from one period to another. This helps investors identify areas where improvements can be made within an organization so they can make informed decisions about investing in it. It also helps creditors assess creditworthiness so they can decide whether or not to lend money to a company based on its ability to meet its obligations over time. By adhering strictly to these principles, businesses will have greater confidence in the accuracy of their books and reports thus leading them towards success.