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The Basic Principles of Accounting

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Published: Feb 12, 2019

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The Business Entity Concept – In accountancy, a clear distinction has been made between the business and its proprietor. Business Entity Concept means that the business should be treated as a separate entity from its owner. A business is a separate entity in the eyes of laws. In legal terms, it can be said that a business can exist even after the existence of its proprietors. Even in the books of accounts of business entity, each transaction is recorded from the perspective of the business and not from point of view of the proprietor.
Going Concern Concept – Going concern concept explains that the business until and unless entered into liquidation, is to be considered having a perpetual or an indefinite life. American Institute of Certified Public Accountants defines it as “'going concern' concept assumes that the business will remain in existence long enough for all the assets of the business to be fully utilized. Utilized assets mean obtaining the complete benefit from their earning potential”. Any business is said to going concern when there is neither an intention nor the necessity to wind up its operations in foreseeable future.
Full Disclosure Concept – Full disclosure concept requires that companies should reveal every aspect of its accounting in their financial statements. According to this concept financial statements should provide fair and full information about they purport to represent.

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What Are Accounting Principles?

How They Work
Basic Accounting Principles

The Bottom Line

Corporate Finance
Financial statements: Balance, income, cash flow, and equity

Accounting Principles: What They Are and How GAAP and IFRS Work

Andy Smith is a Certified Financial Planner (CFP®), licensed realtor and educator with over 35 years of diverse financial management experience. He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Accounting Explained With Brief History and Modern Job Requirements
Accounting Equation
Current and Noncurrent Assets
Accounting Theory
Accounting Principles CURRENT ARTICLE
Accounting Standard
Accounting Convention
Accounting Policies
Principles-Based vs. Rules-Based Accounting
Accounting Method
Accrual Accounting
Cash Accounting
Accrual Accounting vs. Cash Basis Accounting
Financial Accounting Standards Board (FASB)
Generally Accepted Accounting Principles (GAAP)
International Financial Reporting Standards (IFRS)
IFRS vs. GAAP
US Accounting vs. International Accounting
Understanding the Cash Flow Statement
Breaking Down The Balance Sheet
Understanding the Income Statement
Financial Accounting
Financial Accounting and Decision-Making
Financial vs. Managerial Accounting
Cost Accounting
Certified Public Accountant (CPA)
Chartered Accountant (CA)
Accountant vs. Financial Planner
Tax Accounting
Forensic Accounting
Chart of Accounts (COA)
Double Entry
Closing Entry
Introduction to Accounting Information Systems
Inventory Accounting
Last In, First Out (LIFO)
First In, First Out (FIFO)
Average Cost Method

Accounting principles are the rules and guidelines that companies and other bodies must follow when reporting financial data. These rules make it easier to examine financial data by standardizing the terms and methods that accountants must use.

The International Financial Reporting Standards (IFRS) is the most widely used set of accounting principles, with adoption in 168 jurisdictions. The United States uses a separate set of accounting principles, known as generally accepted accounting principles (GAAP) .

Key Takeaways

Accounting standards are implemented to improve the quality of financial information reported by companies.
In the United States, the Financial Accounting Standards Board (FASB) issues generally accepted accounting principles (GAAP).
GAAP is required for all publicly traded companies in the U.S.; it is also routinely implemented by non-publicly traded companies as well.
Internationally, the International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS).
The FASB and the IASB sometimes work together to issue joint standards on hot-topic issues, but there is no intention for the U.S. to switch to IFRS in the foreseeable future.

Ryan Oakley / Investopedia

Understanding Accounting Principles

The ultimate goal of any set of accounting principles is to ensure that a company’s financial statements are complete, consistent, and comparable.

This makes it easier for investors to analyze and extract useful information from the company’s financial statements, including trend data over a period of time. It also facilitates the comparison of financial information across different companies.

Accounting principles also help mitigate accounting fraud by increasing transparency and allowing red flags to be identified.

The ultimate goal of standardized accounting principles is to allow financial statement users to view a company’s financials with certainty that the information disclosed in the report is complete, consistent, and comparable.

Comparability

Comparability is the ability for financial statement users to review multiple companies’ financials side by side with the guarantee that accounting principles have been followed to the same set of standards.

Accounting information is not absolute or concrete, and standards are developed to minimize the negative effects of inconsistent data. Without these rules, comparing financial statements among companies would be extremely difficult, even within the same industry. Inconsistencies and errors also would be harder to spot.

What Are the Basic Accounting Principles?

Some of the most fundamental accounting principles include the following:

Accrual principle
Conservatism principle
Consistency principle
Cost principle
Economic entity principle
Full disclosure principle
Going concern principle
Matching principle
Materiality principle
Monetary unit principle
Reliability principle
Revenue recognition principle
Time period principle

The most notable principles include the revenue recognition principle, matching principle, materiality principle, and consistency principle. Completeness is ensured by the materiality principle, as all material transactions should be accounted for in the financial statements. Consistency refers to a company’s use of accounting principles over time.

When accounting principles allow a choice among multiple methods, a company should apply the same accounting method over time or disclose the change in its accounting method in the footnotes of the financial statements.

Generally accepted accounting principles (GAAP) are uniform accounting principles for private companies and nonprofits in the U.S. These principles are largely set by the Financial Accounting Standards Board (FASB) , an independent nonprofit organization whose members are chosen by the Financial Accounting Foundation .

A similar organization, the Governmental Accounting Standards Board (GASB) , is responsible for setting the GAAP standards for local and state governments. A third body, the Federal Accounting Standards Advisory Board (FASAB), publishes the accounting principles for federal agencies.

Although privately held companies are not required to abide by GAAP, publicly traded companies must file GAAP-compliant financial statements to be listed on a stock exchange. Chief officers of publicly traded companies and their independent auditors must certify that the financial statements and related notes were prepared in accordance with GAAP.

Privately held companies and nonprofit organizations also may be required by lenders or investors to file GAAP-compliant financial statements. For example, annual audited GAAP financial statements are a common loan covenant required by most banking institutions. Therefore, most companies and organizations in the U.S. comply with GAAP, even though it is not a legal requirement.

Accounting principles differ around the world, meaning that it’s not always easy to compare the financial statements of companies from different countries.

The International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS). These standards are used in approximately 168 jurisdictions , including those in the European Union (EU).

The Securities and Exchange Commission (SEC), the U.S. government agency responsible for protecting investors and maintaining order in the securities markets, has expressed interest in transitioning to IFRS. However, because of the differences between the two standards, the U.S. is unlikely to switch in the foreseeable future.

However, the FASB and the IASB continue to work together to issue similar regulations on certain topics as accounting issues arise.

Since accounting principles differ around the world, investors should take caution when comparing the financial statements of companies from different countries. The issue of differing accounting principles is less of a concern in more mature markets. Still, caution should be used, as there is still leeway for number distortion under many sets of accounting principles.

Who Sets Accounting Principles and Standards?

Various bodies are responsible for setting accounting standards. In the United States, generally accepted accounting principles (GAAP) are regulated by the Financial Accounting Standards Board (FASB). In Europe and elsewhere, International Financial Reporting Standards (IFRS) are established by the International Accounting Standards Board (IASB).

How Does IFRS Differ From GAAP?

IFRS is a standards-based approach that is used internationally, while GAAP is a rules-based system used primarily in the U.S. IFRS is seen as a more dynamic platform that is regularly being revised in response to an ever-changing financial environment, while GAAP is more static.

Several methodological differences exist between the two systems. For instance, GAAP allows companies to use either first in, first out (FIFO) or last in, first out (LIFO) as an inventory cost method. LIFO, however, is banned under IFRS .

When Were Accounting Principles First Set Forth?

Standardized accounting principles date back to the advent of double-entry bookkeeping in the 15th and 16th centuries, which introduced a T-ledger with matched entries for assets and liabilities.

Some scholars have argued that the advent of double-entry accounting practices during that time provided a springboard for the rise of commerce and capitalism. What would become the American Institute of Certified Public Accountants (AICPA) and the New York Stock Exchange (NYSE) attempted to launch the first accounting standards to be used by firms in the United States in the 1930s.

What Are Some Critiques of Accounting Principles?

Critics of principles-based accounting systems say they can give companies far too much freedom and do not prescribe transparency. They believe because companies do not have to follow specific rules that have been set out, their reporting may provide an inaccurate picture of their financial health.

In the case of rules-based methods like GAAP, complex rules can cause unnecessary complications in the preparation of financial statements. These critics claim having strict rules means that companies must spend an unfair amount of their resources to comply with industry standards.

Accounting principles are rules and guidelines that companies must abide by when reporting financial data. Which method a company chooses at the outset—or changes to at a later date—must make sound financial sense.

Whether it’s GAAP in the U.S. or IFRS elsewhere, the overarching goal of these principles is to boost transparency and make it easier for investors to compare the financial statements of different companies.

Without these rules and standards, publicly traded companies would likely present their financial information in a way that inflates their numbers and makes their trading performance look better than it actually was. If companies were able to pick and choose what information to disclose, it would be extremely unhelpful for investors.

International Financial Reporting Standards (IFRS) Foundation. “ Who Uses IFRS Accounting Standards? ”

Financial Accounting Standards Board. “ About the FASB .”

Governmental Accounting Standards Board. “ About the GASB .”

Federal Accounting Standards Advisory Board. “ Standards and Guidance .”

CFA Institute. “ US GAAP: Generally Accepted Accounting Principles .”

U.S. Securities & Exchange Commission. “ Spotlight on Work Plan for Global Accounting Standards .”

Deloitte. IAS Plus. " IAS 2 - Inventories ."

American Institute of Certified Public Accountants. “ Is IFRS That Different from U.S. GAAP? ”

Financial Accounting Foundation. “ Accounting Standards .”

Securities and Exchange Commission Historical Society. “ The Richard C. Adkerson Gallery on the SEC Role in Accounting Standards Setting .”

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Essay on Accounting: Meaning, Functions, Importance, Principles and Limitations

Essay on Accounting :- 1. Introduction to Accounting 2. Meaning of Accounting 3. Functions 4. Importance 5. Systems 6. Principles 7. Concepts 8. Accounting Conventions 9. Limitations.

Essay on the Limitations of Accounting

Essay # 1. Introduction to Accounting:

Several thousand years ago when human beings first developed the need to accumulate information about economic resources such as land, livestock and other personal property, accounting got originated. It emerged as an information system formulated for accountability in the exchange of goods and services.

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With the invention of money there was an ease in the manner in which commodities and services were exchanged. Money became a unit of measurement. Throughout history accounting profession has continued to grow in response to the ‘financial information needs’ of individuals and societies.

Accounting is a function of economic and social development. It is the language of business. It records business transactions on a monetary basis in a set of books in a scientific manner. Cash plays a vital role in all types of business activities. One party pays it and the other party receives it. Even in non-cash transactions, cash has to be paid or received in future. Accounting provides information in a classified and a summarized form as financial statements.

It comprises Trading Account, Profit and Loss Account, and Balance Sheet. Account is that aspect of accountability that accounts for the purpose for which cash is paid or received. Trading Account and Profit and Loss Account are prepared to ascertain the profits earned or losses incurred for a particular period. The balance sheet shows the financial position of a business as at a particular point of time.

Accountants are the practitioners of accountancy. They are information specialists who collect, process and report economic information about specific financial events for business and non-business activities. Today, we observe several million individuals engaged in professional accounting activities and several billions dependent on such information. Thus, accounting has a wide scope in the spectrum of economic and social development of any country, be it developed, developing or backward.

ADVERTISEMENTS: (adsbygoogle = window.adsbygoogle || []).push({}); Accounting 2. Meaning of Accounting:

Accounting is considered as ‘the language of business’. It is the language employed to communicate financial information of the business to various parties interested in such information. When an event is to be reported (say in English, Hindi, Kannada), certain rules are followed diligently so that what is communicated is understood by the readers appropriately.

Similarly, in accounting also the events of the business are to be communicated to the users by following certain set of rules diligently, so that the firm does not run into the risk of being misunderstood. Accounting language has two important components – (1) symbols in the form of ‘Debit and Credit’ and (2) grammatical rules in the form of generally accepted accounting principles (GAAP).

Accounting stems from ‘book-keeping’ the science and art of correctly recording in books of account all those business transactions that result in the transfer of money or money’s worth. Accounting relates to the work of maintaining various books of accounts, say, journal proper, subsidiary books, ledger, etc., which are generally done by junior employees as and when the transactions take place.

For this reason these books are called Books of Original Entry. Though the original records are maintained in a systematic way, they cannot by themselves provide information for judgement (decision) unless they are analysed and interpreted. Therefore, accounting comes into the picture.

Examining the cited definitions, we can infer that book-keeping is concerned with recording aspect. On the other hand, being comprehensive in nature, accounting includes book-keeping and spreads its tentacles to the analysis and interpretation of the data recorded. In fact, accounting designs proper system for recording the transactions.

The modern system of accounting is based on ‘double-entry principle’. Being scientific in character, double-entry principle of accounting has definite objectives to fulfill. It prescribes the process through which the objectives can be achieved. Accounting is a macro system.

In its micro system it includes several branches in the form of Financial Accounting, Cost and Management Accounting and others such as Government Accounting, HR Accounting, Inflation Accounting, Environmental Accounting, Farm Accounting, etc.

ADVERTISEMENTS: (adsbygoogle = window.adsbygoogle || []).push({}); Accounting 3. Functions of Accounting:

Functions of accounting may be broadly classified into four categories:

1. Historical Function:

The primary function of accounting is historical in nature, i.e., to maintain a correct record. It includes recording, classifying, summarizing, analysing and interpreting the recorded data of an enterprise (an accounting unit). The major objective of this function is to report at regular intervals to owners/shareholders, management and other interested parties in a desired form and format through financial statements.

2. Managerial Function:

The major purpose of this function is to maximize operational efficiency. In this form it helps in planning future activities, controlling day-to-day operations by comparing actual results with predetermined standards. In short, accounting helps in decision making.

3. Legal Function:

From the viewpoint of accountability, accounting should satisfy the legal requirements of Accounting Standards Board (ASB) as well as the government. For example, audit is compulsory for ensuring compliance of standards.

4. Communicating Function:

Accounting, as a language of business, should be in a position to communicate the information to the users of information say, owners/shareholders, management, creditors, employees, consumers, investors, government, etc.

Accounting 4. Importance of Accounting and its Users:

The importance of accounting is unique as it is useful not only to the internal users but also to the external users (direct and indirect users). The importance of accounting can be understood in the popular use of this systematic information by the interested parties (i.e., the data processed in the form and format meaningful to the user). This systematic information is used by interested persons for decision making.

However, there is no unanimity in different countries as to who these interested parties are. For example, Accounting Standards Board (ASB) of USA in its Statement of Financial Accounting Concepts (SFAC) No.1 states that ‘Present and potential investors, creditors and others are the users’. The Corporate Report (1975) London lists all types of users who need accounting information. The Stamp Report (1980) Canada states that because of broader accountability concept in Canada, the range of users is also broader.

However, the International Accounting Standards Committee (IASC) lists investors, employees, lenders, suppliers and other trade creditors, customers, government and their agencies, public and management as users in its framework (1989). Taking into consideration the above list of users, categorization is made as users of information having direct interest and users of information having indirect interest.

1. Users having Direct Interest:

The users having direct interest in accounting information are considered to be owners and potential owners/management, shareholders and potential shareholders, creditors and potential creditors, suppliers and potential suppliers, employees and consumers, government and tax authorities.

They are briefly discussed in the following list:

(a) The owners/shareholders provide funds to an enterprise in the form of capital. Hence, they are interested in accounting information to know whether the business is conducted on sound lines, whether the capital is used properly, whether it is in a position to provide best of the returns on their investment and whether the business is run on legal and ethical norms.

The income statement and the statement of affairs prepared from time to time should be in accordance with the accounting standards so that comparability and decision making become easier.

(b) The management is interested in financial accounting to determine whether the business is profitable, whether the position is sound and whether it has competitive advantage. Financial accounting, being the eyes and ears of management, facilitates decision making in relation to expansion, diversification, etc., and framing of suitable policies for future.

(c) The creditors are interested in the financial soundness of a business. They may be suppliers of goods on credit, lenders of money, bankers and others who would support the enterprise by providing credit facilities. Their main interest is security for credit, apart from income. They carefully scrutinize the income statement and position statement from time to time in addition to watching the business operations closely from outside by means of disciplined enquiry.

(d) The investors/prospective investors (apart from shareholders) are interested to know how far their investment is safe or is going to be safe. They examine carefully the statements of income and position to assess the soundness of the business. Altogether they are interested in the safety of their investment along with returns.

(e) The consumers are interested to get the goods at a fair price (comparatively reduced price). They are much interested to know the control mechanism adopted by the enterprise so that cost reduction is made possible.

(f) The employees are interested in accounting of the enterprise so as to assess the profitability which would be the basic factor for determining higher wages, bonus, better working conditions, etc. The sound financial position of the enterprise encourages them to contribute their best to the firm.

(g) The government (central, state and local bodies) is interested in accounting of the enterprise to know the earnings based on which taxes could be collected to formulate revenue. Further, for compiling ‘national income’ accounting prepared on the basis of accountability becomes essential.

(i) The general public is interested in the accounting of a firm from the point of view of the firm’s social responsibility. In addition, it may comprise prospective lenders, investors, consumers who would closely watch the financial progress of the enterprise.

(j) The researchers are equally interested in accounting of an enterprise. They utilize the data for their research purposes to interprete and suggest new ways of maintaining accounts based on standard measurement, usefulness and decision making.

Thus, the importance of accounting is recognized by its users and with the fact that accountability cannot be established without accounting.

2. Users having Indirect Interest:

The users having indirect interest in accounting information are considered to be financial analysts, stock exchanges, lawyers, regulatory authorities, registration authorities, financial press and reporting agencies, trade associations and labour unions. These users are generally agencies which help/protect such persons or potential persons having a direct interest in them.

Table 6.1 provides decision usefulness of accounting information.

Accounting Principles, Assumptions, and Concepts

In Introduction to Financial Statements , you learned that the Financial Accounting Standards Board (FASB) is an independent, nonprofit organization that sets the standards for financial accounting and reporting, including generally accepted accounting principles (GAAP) , for both public- and private-sector businesses in the United States.

As you may also recall, GAAP are the concepts, standards, and rules that guide the preparation and presentation of financial statements. If US accounting rules are followed, the accounting rules are called US GAAP. International accounting rules are called International Financial Reporting Standards (IFRS) . Publicly traded companies (those that offer their shares for sale on exchanges in the United States) have the reporting of their financial operations regulated by the Securities and Exchange Commission (SEC) .

You also learned that the SEC is an independent federal agency that is charged with protecting the interests of investors, regulating stock markets, and ensuring companies adhere to GAAP requirements. By having proper accounting standards such as US GAAP or IFRS, information presented publicly is considered comparable and reliable. As a result, financial statement users are more informed when making decisions. The SEC not only enforces the accounting rules but also delegates the process of setting standards for US GAAP to the FASB.

Some companies that operate on a global scale may be able to report their financial statements using IFRS. The SEC regulates the financial reporting of companies selling their shares in the United States, whether US GAAP or IFRS are used. The basics of accounting discussed in this chapter are the same under either set of guidelines.

Ethical Considerations

Auditing of publicly traded companies.

When a publicly traded company in the United States issues its financial statements, the financial statements have been audited by a Public Company Accounting Oversight Board (PCAOB) approved auditor. The PCAOB is the organization that sets the auditing standards, after approval by the SEC. It is important to remember that auditing is not the same as accounting. The role of the Auditor is to examine and provide assurance that financial statements are reasonably stated under the rules of appropriate accounting principles. The auditor conducts the audit under a set of standards known as Generally Accepted Auditing Standards. The accounting department of a company and its auditors are employees of two different companies. The auditors of a company are required to be employed by a different company so that there is independence.

The nonprofit Center for Audit Quality explains auditor independence: “Auditors’ independence from company management is essential for a successful audit because it enables them to approach the audit with the necessary professional skepticism.” 1 The center goes on to identify a key practice to protect independence by which an external auditor reports not to a company’s management, which could make it more difficult to maintain independence, but to a company’s audit committee. The audit committee oversees the auditors’ work and monitors disagreements between management and the auditor about financial reporting. Internal auditors of a company are not the auditors that provide an opinion on the financial statements of a company. According to the Center for Audit Quality, “By law, public companies’ annual financial statements are audited each year by independent auditors—accountants who examine the data for conformity with U.S. Generally Accepted Accounting Principles (GAAP).” 2 The opinion from the independent auditors regarding a publicly traded company is filed for public inspection, along with the financial statements of the publicly traded company.

The Conceptual Framework

The FASB uses a conceptual framework , which is a set of concepts that guide financial reporting. These concepts can help ensure information is comparable and reliable to stakeholders. Guidance may be given on how to report transactions, measurement requirements, and application on financial statements, among other things. 3

IFRS Connection

Gaap, ifrs, and the conceptual framework.

The procedural part of accounting—recording transactions right through to creating financial statements—is a universal process. Businesses all around the world carry out this process as part of their normal operations. In carrying out these steps, the timing and rate at which transactions are recorded and subsequently reported in the financial statements are determined by the accepted accounting principles used by the company.

As you learned in Role of Accounting in Society , US-based companies will apply US GAAP as created by the FASB, and most international companies will apply IFRS as created by the International Accounting Standards Board (IASB). As illustrated in this chapter, the starting point for either FASB or IASB in creating accounting standards, or principles, is the conceptual framework. Both FASB and IASB cover the same topics in their frameworks, and the two frameworks are similar. The conceptual framework helps in the standard-setting process by creating the foundation on which those standards should be based. It can also help companies figure out how to record transactions for which there may not currently be an applicable standard. Though there are many similarities between the conceptual framework under US GAAP and IFRS, these similar foundations result in different standards and/or different interpretations.

Once an accounting standard has been written for US GAAP, the FASB often offers clarification on how the standard should be applied. Businesses frequently ask for guidance for their particular industry. When the FASB creates accounting standards and any subsequent clarifications or guidance, it only has to consider the effects of those standards, clarifications, or guidance on US-based companies. This means that FASB has only one major legal system and government to consider. When offering interpretations or other guidance on application of standards, the FASB can utilize knowledge of the US-based legal and taxation systems to help guide their points of clarification and can even create interpretations for specific industries. This means that interpretation and guidance on US GAAP standards can often contain specific details and guidelines in order to help align the accounting process with legal matters and tax laws.

In applying their conceptual framework to create standards, the IASB must consider that their standards are being used in 120 or more different countries, each with its own legal and judicial systems. Therefore, it is much more difficult for the IASB to provide as much detailed guidance once the standard has been written, because what might work in one country from a taxation or legal standpoint might not be appropriate in a different country. This means that IFRS interpretations and guidance have fewer detailed components for specific industries as compared to US GAAP guidance.

The conceptual framework sets the basis for accounting standards set by rule-making bodies that govern how the financial statements are prepared. Here are a few of the principles, assumptions, and concepts that provide guidance in developing GAAP.

Revenue Recognition Principle

The revenue recognition principle directs a company to recognize revenue in the period in which it is earned; revenue is not considered earned until a product or service has been provided. This means the period of time in which you performed the service or gave the customer the product is the period in which revenue is recognized.

There also does not have to be a correlation between when cash is collected and when revenue is recognized. A customer may not pay for the service on the day it was provided. Even though the customer has not yet paid cash, there is a reasonable expectation that the customer will pay in the future. Since the company has provided the service, it would recognize the revenue as earned, even though cash has yet to be collected.

For example, Lynn Sanders owns a small printing company, Printing Plus. She completed a print job for a customer on August 10. The customer did not pay cash for the service at that time and was billed for the service, paying at a later date. When should Lynn recognize the revenue, on August 10 or at the later payment date? Lynn should record revenue as earned on August 10. She provided the service to the customer, and there is a reasonable expectation that the customer will pay at the later date.

Expense Recognition (Matching) Principle

The expense recognition principle (also referred to as the matching principle ) states that we must match expenses with associated revenues in the period in which the revenues were earned. A mismatch in expenses and revenues could be an understated net income in one period with an overstated net income in another period. There would be no reliability in statements if expenses were recorded separately from the revenues generated.

For example, if Lynn earned printing revenue in April, then any associated expenses to the revenue generation (such as paying an employee) should be recorded on the same income statement. The employee worked for Lynn in April, helping her earn revenue in April, so Lynn must match the expense with the revenue by showing both on the April income statement.

Cost Principle

The cost principle , also known as the historical cost principle , states that virtually everything the company owns or controls ( assets ) must be recorded at its value at the date of acquisition. For most assets, this value is easy to determine as it is the price agreed to when buying the asset from the vendor. There are some exceptions to this rule, but always apply the cost principle unless FASB has specifically stated that a different valuation method should be used in a given circumstance.

The primary exceptions to this historical cost treatment, at this time, are financial instruments, such as stocks and bonds, which might be recorded at their fair market value. This is called mark-to-market accounting or fair value accounting and is more advanced than the general basic concepts underlying the introduction to basic accounting concepts; therefore, it is addressed in more advanced accounting courses.

Once an asset is recorded on the books, the value of that asset must remain at its historical cost, even if its value in the market changes. For example, Lynn Sanders purchases a piece of equipment for $40,000. She believes this is a bargain and perceives the value to be more at $60,000 in the current market. Even though Lynn feels the equipment is worth $60,000, she may only record the cost she paid for the equipment of $40,000.

Full Disclosure Principle

The full disclosure principle states that a business must report any business activities that could affect what is reported on the financial statements. These activities could be nonfinancial in nature or be supplemental details not readily available on the main financial statement. Some examples of this include any pending litigation, acquisition information, methods used to calculate certain figures, or stock options. These disclosures are usually recorded in footnotes on the statements, or in addenda to the statements.

Separate Entity Concept

The separate entity concept prescribes that a business may only report activities on financial statements that are specifically related to company operations, not those activities that affect the owner personally. This concept is called the separate entity concept because the business is considered an entity separate and apart from its owner(s).

For example, Lynn Sanders purchases two cars; one is used for personal use only, and the other is used for business use only. According to the separate entity concept, Lynn may record the purchase of the car used by the company in the company’s accounting records, but not the car for personal use.

Conservatism

This concept is important when valuing a transaction for which the dollar value cannot be as clearly determined, as when using the cost principle. Conservatism states that if there is uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount. This would mean that any uncertain or estimated expenses/losses should be recorded, but uncertain or estimated revenues/gains should not. This understates net income, therefore reducing profit. This gives stakeholders a more reliable view of the company’s financial position and does not overstate income.

Monetary Measurement Concept

In order to record a transaction, we need a system of monetary measurement , or a monetary unit by which to value the transaction. In the United States, this monetary unit is the US dollar. Without a dollar amount, it would be impossible to record information in the financial records. It also would leave stakeholders unable to make financial decisions, because there is no comparability measurement between companies. This concept ignores any change in the purchasing power of the dollar due to inflation.

Going Concern Assumption

The going concern assumption assumes a business will continue to operate in the foreseeable future. A common time frame might be twelve months. However, one should presume the business is doing well enough to continue operations unless there is evidence to the contrary. For example, a business might have certain expenses that are paid off (or reduced) over several time periods. If the business will stay operational in the foreseeable future, the company can continue to recognize these long-term expenses over several time periods. Some red flags that a business may no longer be a going concern are defaults on loans or a sequence of losses.

Time Period Assumption

The time period assumption states that a company can present useful information in shorter time periods, such as years, quarters, or months. The information is broken into time frames to make comparisons and evaluations easier. The information will be timely and current and will give a meaningful picture of how the company is operating.

For example, a school year is broken down into semesters or quarters. After each semester or quarter, your grade point average (GPA) is updated with new information on your performance in classes you completed. This gives you timely grading information with which to make decisions about your schooling.

A potential or existing investor wants timely i nformation by which to measure the performance of the company, and to help decide whether to invest. Because of the time period assumption, we need to be sure to recognize revenues and expenses in the proper period. This might mean allocating costs over more than one accounting or reporting period.

The use of the principles, assumptions, and concepts in relation to the preparation of financial statements is better understood when looking at the full accounting cycle and its relation to the detailed process required to record business activities ( Figure 3.2 ).

Concepts In Practice

Tax cuts and jobs act.

In 2017, the US government enacted the Tax Cuts and Jobs Act. As a result, financial stakeholders needed to resolve several issues surrounding the standards from GAAP principles and the FASB. The issues were as follows: “Current Generally Accepted Accounting Principles (GAAP) requires that deferred tax liabilities and assets be adjusted for the effect of a change in tax laws or rates,” and “implementation issues related to the Tax Cuts and Jobs Act and income tax reporting.” 4

In response, the FASB issued updated guidance on both issues. You can explore these revised guidelines at the FASB website (https://www.fasb.org/taxcutsjobsact#section_1).

The Accounting Equation

Introduction to Financial Statements briefly discussed the accounting equation, which is important to the study of accounting because it shows what the organization owns and the sources of (or claims against) those resources. The accounting equation is expressed as follows:

Recall that the accounting equation can be thought of from a “sources and claims” perspective; that is, the assets (items owned by the organization) were obtained by incurring liabilities or were provided by owners. Stated differently, everything a company owns must equal everything the company owes to creditors (lenders) and owners (individuals for sole proprietors or stockholders for companies or corporations).

In our example in Why It Matters , we used an individual owner, Mark Summers, for the Supreme Cleaners discussion to simplify our example. Individual owners are sole proprietors in legal terms. This distinction becomes significant in such areas as legal liability and tax compliance. For sole proprietors, the owner’s interest is labeled “owner’s equity.”

In Introduction to Financial Statements , we addressed the owner’s value in the firm as capital or owner’s equity . This assumed that the business is a sole proprietorship. However, for the rest of the text we switch the structure of the business to a corporation, and instead of owner’s equity, we begin using stockholder’s equity , which includes account titles such as common stock and retained earnings to represent the owners’ interests. The primary reason for this distinction is that the typical company can have several to thousands of owners, and the financial statements for corporations require a greater amount of complexity.

As you also learned in Introduction to Financial Statements , the accounting equation represents the balance sheet and shows the relationship between assets, liabilities, and owners’ equity (for sole proprietorships/individuals) or common stock (for companies).

You may recall from mathematics courses that an equation must always be in balance. Therefore, we must ensure that the two sides of the accounting equation are always equal. We explore the components of the accounting equation in more detail shortly. First, we need to examine several underlying concepts that form the foundation for the accounting equation: the double-entry accounting system, debits and credits, and the “normal” balance for each account that is part of a formal accounting system.

Double-Entry Bookkeeping

The basic components of even the simplest accounting system are accounts and a general ledger . An account is a record showing increases and decreases to assets, liabilities, and equity—the basic components found in the accounting equation. As you know from Introduction to Financial Statements , each of these categories, in turn, includes many individual accounts, all of which a company maintains in its general ledger. A general ledger is a comprehensive listing of all of a company’s accounts with their individual balances.

Accounting is based on what we call a double-entry accounting system , which requires the following:

Each time we record a transaction, we must record a change in at least two different accounts. Having two or more accounts change will allow us to keep the accounting equation in balance.
Not only will at least two accounts change, but there must also be at least one debit and one credit side impacted.
The sum of the debits must equal the sum of the credits for each transaction.

In order for companies to record the myriad of transactions they have each year, there is a need for a simple but detailed system. Journals are useful tools to meet this need.

Debits and Credits

Each account can be represented visually by splitting the account into left and right sides as shown. This graphic representation of a general ledger account is known as a T-account . The concept of the T-account was briefly mentioned in Introduction to Financial Statements and will be used later in this chapter to analyze transactions. A T-account is called a “T-account” because it looks like a “T,” as you can see with the T-account shown here.

A debit records financial information on the left side of each account. A credit records financial information on the right side of an account. One side of each account will increase and the other side will decrease. The ending account balance is found by calculating the difference between debits and credits for each account. You will often see the terms debit and credit represented in shorthand, written as DR or dr and CR or cr , respectively. Depending on the account type, the sides that increase and decrease may vary. We can illustrate each account type and its corresponding debit and credit effects in the form of an expanded accounting equation . You will learn more about the expanded accounting equation and use it to analyze transactions in Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions .

As we can see from this expanded accounting equation, Assets accounts increase on the debit side and decrease on the credit side. This is also true of Dividends and Expenses accounts. Liabilities increase on the credit side and decrease on the debit side. This is also true of Common Stock and Revenues accounts. This becomes easier to understand as you become familiar with the normal balance of an account.

Normal Balance of an Account

The normal balance is the expected balance each account type maintains, which is the side that increases. As assets and expenses increase on the debit side, their normal balance is a debit. Dividends paid to shareholders also have a normal balance that is a debit entry. Since liabilities, equity (such as common stock), and revenues increase with a credit, their “normal” balance is a credit. Table 3.1 shows the normal balances and increases for each account type.

Type of account	Increases with	Normal balance
Asset	Debit	Debit
Liability	Credit	Credit
Common Stock	Credit	Credit
Dividends	Debit	Debit
Revenue	Credit	Credit
Expense	Debit	Debit

When an account produces a balance that is contrary to what the expected normal balance of that account is, this account has an abnormal balance . Let’s consider the following example to better understand abnormal balances.

Let’s say there were a credit of $4,000 and a debit of $6,000 in the Accounts Payable account. Since Accounts Payable increases on the credit side, one would expect a normal balance on the credit side. However, the difference between the two figures in this case would be a debit balance of $2,000, which is an abnormal balance. This situation could possibly occur with an overpayment to a supplier or an error in recording.

We define an asset to be a resource that a company owns that has an economic value. We also know that the employment activities performed by an employee of a company are considered an expense, in this case a salary expense. In baseball, and other sports around the world, players’ contracts are consistently categorized as assets that lose value over time (they are amortized).

For example, the Texas Rangers list “Player rights contracts and signing bonuses-net” as an asset on its balance sheet. They decrease this asset’s value over time through a process called amortization . For tax purposes, players’ contracts are treated akin to office equipment even though expenses for player salaries and bonuses have already been recorded. This can be a point of contention for some who argue that an owner does not assume the lost value of a player’s contract, the player does. 5

1 Center for Audit Quality. Guide to Public Company Auditing . https://www.iasplus.com/en/binary/usa/aicpa/0905caqauditguide.pdf
2 Center for Audit Quality. Guide to Public Company Auditing . https://www.iasplus.com/en/binary/usa/aicpa/0905caqauditguide.pdf
3 Financial Accounting Standards Board. “The Conceptual Framework.” http://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774
4 Financial Accounting Standards Board (FASB). “Accounting for the Tax Cuts and Jobs Act.” https://www.fasb.org/taxcutsjobsact#section_1
5 Tommy Craggs. “MLB Confidential, Part 3: Texas Rangers.” Deadspin. August 24, 2010. https://deadspin.com/5619951/mlb-confidential-part-3-texas-rangers

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Accounting: Purposes and Principles Essay

When it comes to the definition of accounting, it is often described as identification, measurement and consequent communication of economic information that enables its users to make knowledgeable decisions. This information concerns finances and, therefore, is presented in monetary terms. Thus, according to Learn Basic Accounting Easy (2014), accounting is a process used to provide financial data on the activities of profit-seeking businesses and non-profit organizations. For instance, bank officials can review a company’s financial records to assess its ability to redeem a loan. Potential investors might want to compare the accounting data of a handful of companies to determine which one suggests the best investment. Additionally, business owners use this information to create budgets for their organizations.

Basic accounting principles can teach one the so-called ‘language of business’ – that is, concepts and terms which have been adopted and are widely used in the business world. If one understands the guidelines of accounting information being prepared, it puts them in an advantageous position when facing a situation of making an important decision. Moreover, there are peculiarities in presenting such data too: as per AccountingWITT (2010), among those who might want to hear the story of a business are internal users, external users, and the government. Even though the data presented to all these parties is the same, one is to use different approaches when delivering it to each of them. Managerial accounting is the language with which information is to be conveyed to internal users, whereas for external ones, financial accounting is the appropriate way; with the government, one is to resort to tax accounting. Understanding that makes one a more competent manager and makes it easier to work with them.

It is evident that reliable information is essential in enabling those in charge to make appropriate decisions – and having access to such information is the key. This is precisely why accounting is so important – it is the tool to provide one with all the data necessary to move in the right direction when it comes to business-making. It is used to assess the financial implications of various alternatives and soundly allocate resources. Accountants are able to measure the future: uncertainty is reduced with the use of professional judgment to quantify implications of taking or postponing action. Dunn (2011) states that it confers them with great power as well as with great responsibility: their mistakes might be more crucial than mistakes of other specialists. It can lead a business or an organization to failure recovering from which might be difficult.

Businesses can have many goals and objectives. For instance, a goal of a restaurant’s owner may be the improvement of the building’s physical form. However, the main objectives of each enterprise are profitability and solvency. Profitability is the ability of income generation, whereas solvency is the ability of well-timed debt payment. Unless an enterprise can generate a sufficient income and pay debts until they expire, it will not be able to survive to achieve its other goals (Learn Basic Accounting Easy, 2014). These concepts are reflected in the accounting equation, which embodies the structure of the corporate financial statements.

Corporate financial statements are written records conveying the company’s strength and profitability. According to Dunn (2011), there are four main corporate financial statements. The income statement is the one reflecting the organization’s profitability. The statement of retained earnings presents a change in such earnings over a particular period (for example, month or year). The balance sheet discloses the financial position and solvency of the company. Finally, the statement of cash flows encapsulates the organization’s cash flow and outflow over a certain time period.

AccountingWITT. (2010). What is accounting? [Video]. YouTube. Web.

Dunn, K. (2011). Introduction to Accounting I: An intuitive approach [Video]. YouTube. Web.

Learn Basic Accounting Easy. (2014). Purpose of accounting [Video]. YouTube. Web.

Accounting Basics and How to Remember Them
The Financial Accounting Concepts
Solvency Risk and Liquidity Risk of a Bank Differences
How Liquidity and Solvency Affect Company Abilities
Review of Sharpe’s BMW
Accounting: Adjustment of Figures in a Firm's Books
Importance of Account of Investments for Companies
Financial Accounting and Economic Policy Uncertainty
Managerial Accounting: Transfer Price Analysis of CMI
The Differences between PP&E and R&M Accounts
Chicago (A-D)
Chicago (N-B)

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Accounting Principles: A Business Perspective

(5 reviews)

Roger H. Hermanson, Georgia State University

James D. Edwards, University of Georgia

Michael W. Maher, University of California at Davis

Publisher: BCcampus

Language: English

Formats Available

Conditions of use.

Learn more about reviews.

Reviewed by Kim Johnson, Professor, Hutchinson Community College on 1/25/22

Comprehensiveness rating: 5 see less

This is a book that explains a variety of financial accounting concepts, then dabbles in managerial accounting concepts toward the end of the book. It appears to be a good reference guide for someone to learn about how accounting is used in the business world. For a beginner’s guide, the depth of knowledge is outstanding in this text. For example, quality management is a topic that can be found repeatedly in this text. Explanations for how the content can be used to improve business processes are beneficial to learning. The text also explains how all stakeholders in the business can benefit from accounting knowledge.

Content Accuracy rating: 5

The book appears to be accurate. I don’t see any areas of concern when it comes to accuracy.

Relevance/Longevity rating: 4

The year 2010 is used in most of the exhibits. Sometimes a book loses credibility if it appears to be out of date, so the book could be updated to use 20XX to have the appearance of being up to date. The “Business Insight” areas of the text could lose relevance as companies leave the marketplace, but most appear to be currently relevant.

Clarity rating: 4

All exhibits are in black and white. I am not sure if this can be changed, but different colors of font or highlights might be appropriate when a new account or process is being displayed in the exhibit. The exhibits, however, seem to be very good and informational.

Consistency rating: 5

The book is consistent from chapter to chapter, with objectives coming first, then moving into the content. Key terms, questions, exercises, problems, case questions and group problems come at the end of the chapter. I especially like the group problems. I have my students work in small groups almost every day, so these short, content-specific group ideas will be useful for face-to-face classes or online group discussions.

Modularity rating: 5

The content is organized and easy-to-read. Information is given in small chunks of information, with exhibits and real world examples mixed into the reading material. Each section has its own set of questions to check for knowledge.

Organization/Structure/Flow rating: 5

The organization of the text is similar to most accounting textbooks I have used in the past, except for there is an omission of partnerships as a separate topic. The reason for this omission is explained in the first chapter. The authors omitted partnerships after surveying users and nonusers of their text because many small business owners do not operate as partnerships, but rather LLCs. So this text focuses on sole proprietorships and LLCs and only briefly discusses partnerships. Otherwise, the main concepts and flow of the book are very similar to most accounting textbooks, beginning with sole proprietorships and discussing inventory, payroll, etc. The book then moves to corporations, and ends with a few managerial accounting topics.

Interface rating: 4

It is only available in pdf format. A teacher could still link to the pdf within an online course, but a website for the book would likely help students access the book. The chapter titles in the table of contents are hyperlinks. When clicked, they take the viewer straight to the content.

Grammatical Errors rating: 5

I did not see any grammatical issues.

Cultural Relevance rating: 5

Accounting is typically not a topic that needs cultural references. The book should not be offensive to any culture.

Reviewed by Bangjun Wu, Accounting Instructor, Peralta Community College District on 1/1/20

This book covers materials taught in Financial Accounting and Managerial Accounting introductory courses. The table of contents contains links and can be clicked to reach specific sections. Key terms and excercises are provided at the end of each chapter. Concepts are explained clearly. There are also "ethical perspectives" and "uses of technology" sections throughout the chapters.

I sampled chapters to review. The book appear to be accurate and unbiased in the sections I reviewed.

The concepts and examples in this book are still very relevant and applicable as of 2019, although this book appear to be written in 2009. If possible please update "Salary potential of accountants" in Chapter 1. Also recommend evaluate new accounting pronouncements in the last decade to see if any updates needed in Chapter 5, "The Major Principles" section.

Clarity rating: 5

The book is written in accessible language and provides adequate context for accounting jargon/technical terminologies used.

Chapters follow consistent layouts, which makes it easier for students to follow.

The book is divided into smaller reading sections within chapters indicated with bold blue-colored headings. These smaller sections are also indexed in the table of contents.

Organization/Structure/Flow rating: 4

The book is overall well organized in the flow of concepts. I do, however, feel that chapter 5 "Accounting Theory" as a single chapter may not be the most effective for students' learning purpose. Accurate and important as this chapter is, it is close to 40 pages of hard concepts. If the audience of this book is students who are just starting to learn accounting, this chapter may feel hard and dry. As an instrutor, I would highlight the revenue recoginition principle and matching principle in the section where I explain accounting transactions (chapter 2). As a textbook, i think it's more effective to list these concepts in high level within the first 3 chapters- not as a separate chapter, reference these concepts throughout the chapters wherever applicable, and maybe keep all the accounting theory section as an appendix.

Interface rating: 5

I didn't notice interface issues.

The book appear to be grammatically correct.

The text is not culturally insensitive or offensive

Congratualtions on a book well-written! I appreciate the efforts the authors put into the creation of this book. I especially applaude the ethical discussions and "uses of technology" in the chapters.

Reviewed by Dr. Susan Weiss, Assistant Professor, Rhode Island College on 12/1/19

The textbook covers two semesters of accounting principles courses--both financial and managerial. Includes all the major requirements for covering asset, liability and equity accounts; in addition, covers CVP analysis, job costing, differential analysis, even simplified variance analysis and capital budgeting. Truly, for the access, it is solid coverage in a basic foundation for business students.

In general, the book provides coverage in appropriate depth to support the needs of a first year accounting curriculum. In reviewing some of the aspects within the internal control chapter, for instance, there is appropriate emphasis on the Foreign Corrupt Practices Act as well as the Sarbanes-Oxley Act. The problems which support learning objectives are of adequate difficulty to challenge principles level students. On page 93, noted "Trail balance" was indicated instead of "Trial balance."

Relevance/Longevity rating: 5

Overall, the basic theory of financial accounting changes incrementally over time, responding to new GAAP requirements as indicated. Noted were a few indications of SFASs originally numbered; a suggestion would be to include the equivalent Accounting Standards Codification (ASC) section as it has been in use for approximately a decade now. The Use of Technology sections are excellent examples of applicability which would pique interest in students of management information systems, data analysis, and finance as well as accounting. An update to replace The Limited as a subject company in the financial accounting area would be an enhancement.

The grammatical accuracy lends itself to the clarity presented. There is appropriate jargon employed when necessary. There is less depth in delving into reasons for overhead variances as an example. Certainly, the emphasis at the principles level is primarily on basic application and calculation. However, the basis is appropriate for building further complexity at the Intermediate and higher levels.

The text appropriately invokes the terminology required and maintains consistency throughout the text. This is especially critical when providing information regarding managerial accounting, which is a cumulative learning process. Although there is some terminology that is used that is not exact, it is much less the case than other textbooks I have used and reviewed.

There is potential for exclusion of chapters to conform to schedule requirements for a course, even if a different text is used for managerial or principles. Also, if there is a desire or need to exclude certain chapters the textbook provides that flexibility.

The topics within the book are sequentially arranged much like prominent texts within the discipline. The sequential presentation makes sense from a theoretical perspective, both in the financial and managerial sections.

There are no noted interface issues.

Overall I found the book to be excellently written. Many textbooks today are written in quite colloquial language. Accounting is a discipline which requires compliance with regulations and principles as established by many agencies, governments, and conventionality. We must maintain and instill compliance among the student learners of today. To do so requires a specific level of vocabulary. This text exemplifies the appropriate level of grammar in which a professional would be expected to communicate.

Noted no issues with respect to culturally or socially sensitive topics.

There are a number of times in which accounting profession career opportunities, salaries, etc. are mentioned incrementally throughout the text. It is rather interesting to remind students of these facts during the course of their studies. The text also highlights the importance of certification, as well as the requirements. This is also refreshing as students may consider their future career path as they progress through the course and become acquainted with topics that interest them. An improvement that would perhaps encourage adoption is the accompaniment of a MOOC-based homework manager for a small fee.

Reviewed by Colleen Everts, Associate Professor, Franklin College on 1/22/19

This text covers all appropriate content areas I would expect to find in a Principles textbook. The chapters mirror closely the current textbook I am using. I appreciate that the index is linked so you can click on the chapter you want and it will take you right there. The addition of a responsibility accounting chapter is my favorite topical area that is not always covered in traditional texts but is gaining traction.

I did not read all chapters thoroughly, however, what I did read was accurate and unbiased.

The content is up-to-date and is arranged in a way in which updates would be easy to make. The emphasis on going outside the book and "surf the net" is practical and needed in today's world. The authors also include "ethical perspectives" throughout each chapter highlighting the importance of integrity and honesty and asks the reader to think about what they would do.

Clarity rating: 3

The text itself is clear, however some pages are completely text and do not include pictures, graphics, breaks, color etc... While the content is clear to me I fear that my students would struggle jumping into this book. The introduction and first chapter cover too much material and include too much accounting jargon so my students would feel overwhelmed. I like the review section at the end of the chapter that reiterates, again, the main points of the chapter in a slightly different way adding another layer of clarity for the reader.

The text is consistent from chapter to chapter and follows GAAP while referencing IFRS. Each chapter has the same structure making it easy for students to get in the flow.

Modularity rating: 4

The text is easily divisible, however the chapter contents are not clearly broken into learning objectives as stated at the beginning of each chapter. To be clear the content is broken up that way, just not labelled. It would be fairly easy to divide the content, it would just take a little more work to find the right page.

This text is organized in a logical manner consistent with other accounting textbooks. The text includes links in the index to the content making it easier to maneuver.

I did not find any issues with the display of the text.

I did not find any major grammatical errors.

I did not find the text be culturally insensitive. The examples use a variety of company names and pronouns.

I am thankful to have the option to use a free textbook in my classes. Tuition rates and student-debt continue to rise so any chance I have to cut the cost for my students removes a barrier to their success. I am hesitant to use this specific text in my class because the overall appeal is uninviting as well the overwhelming amount of information included in the first few chapters. I plan to look at other options or incorporate pieces of free texts into my class even just as supplemental material.

Reviewed by Mike Matousek, Instructor, Portland Community College - Portland OR on 8/2/18

The book was comprehensive and covered a wide breadth of topics. There was an extensive table of contents but no index or glossary provided. The comprehensiveness of the book actually was a bit of a negative from my perspective because the on-ramp for students new to the subject was too steep, and I think my students would really struggle with being able to understand the material as deeply as it was presented almost from the very beginning of this text.

I did not notice any errors or biases in the content of the text. Examples and case studies seemed appropriate and correctly laid out and explained.

It seemed like the content was appropriately up to date and examples were relevant. The only thing that I noticed, and it may be a bit nit-picky, is that some really out of date years were used in the text as part of problems and examples. The oldest that I saw referred to 2009, which I guess isn't too bad but I'm used to seeing 201X as the year in the texts I regularly use.

Clarity of the text was OK. I thought the problems and examples were very well done but I did have a problem with the pacing of the material especially in the first few chapters. If these were early level accounting students I think they would have been lost in the first 3 chapters due to the complexity of the concepts introduced early in the text.

This appeared to be done well and I did not notice any inconsistencies.

The text read a lot like the texts I am currently using from major publishers. I thought the modularity of the text was probably its best feature as I found it easy to read, broken up well into sections with ample examples and sidebars. Very well done in my opinion.

Organization/Structure/Flow rating: 3

This was not terrible, but as I've already noted I thought the flow was off in the early chapters. It seemed too complex in the latter part of chapter 1 and through all of chapter 2 and the beginning of chapter 3. After that point it seemed to settle into a better pattern in terms of the flow, but by then I think many of my students would have been totally lost.

It looked like a very professionally laid out text and I did not notice anything in it that distracted or confused me in any way.

I did not notice any grammatical errors but admittedly I was skimming the material and not closely searching for them.

Cultural Relevance rating: 4

The text is not culturally insensitive. I did not notice a specific attempt to include a variety of backgrounds, although that can be somewhat difficult to include in accounting problems/scenarios without it seeming very forced. I thought the text was fine in this area.

I really enjoyed reading through this text. It was my first look at any open source material and I was surprised and impressed by the level of professionalism. I would not choose to use this book for my particular classes because of the complexity of the early "ramp-up" chapters, but I thought the problems, examples and overall layout of the material was excellent. It was far better than I expected and I look forward to reviewing and potentially using open source material in my classes in the future.

1. Accounting and its use in business decisions
2. Recording business transactions
3. Adjustments for financial reporting
4. Completing the accounting cycle
5. Accounting theory
6. Merchandising transactions
7. Measuring and reporting inventories
8. Control of cash
9. Receivables and payables
10. Property, plant, and equipment
11. Plant asset disposals, natural resources, and intangible assets
12. Stockholders' equity: Classes of capital stock
13. Corporations: Paid-in capital, retained earnings, dividends, and treasury stock
14. Stock investments
15. Long-term financing: Bonds
16. Analysis using the statement of cash flows
17. Analysis and interpretation of financial statements
18. Managerial accounting concepts/job costing
19. Process: Cost systems
20. Using accounting for quality and cost management
21. Cost-volume-profit analysis
22. Short-term decision making: Differential analysis
23. Budgeting for planning and control
24. Control through standard costs
25. Responsibility accounting: Segmental analysis
26. Capital budgeting: Long-range planning

Ancillary Material

About the book.

Accounting Principles: A Business Perspective uses annual reports of real companies to illustrate many of the accounting concepts in use in business today. Gaining an understanding of accounting terminology and concepts, however, is not enough to ensure your success. You also need to be able to find information on the Internet, analyze various business situations, work effectively as a member of a team, and communicate your ideas clearly. This text was developed to help you develop these skills.

About the Contributors

Professor Roger H. Hermanson, PhD, CPA Regents Professor Emeritus of Accounting and Ernst & Young-J. W. Holloway Memorial Professor Emeritus at Georgia State University. He received his doctorate at Michigan State University in 1963 and is a CPA in Georgia. Professor Hermanson taught and later served as chairperson of the Division of Accounting at the University of Maryland. He has authored or coauthored approximately one-hundred articles for professional and scholarly journals and has coauthored numerous editions of several textbooks, including Accounting Principles, Financial Accounting, Survey of Financial and Managerial Accounting, Auditing Theory and Practice, Principles of Financial and Managerial Accounting, and Computerized Accounting with Peachtree Complete III. He also has served on the editorial boards of the Journal of Accounting Education, New Accountant, Accounting Horizons, and Management Accounting. Professor Hermanson has served as co-editor of the Trends in Accounting Education column for Management Accounting. He has held the office of vice president of the American Accounting Association and served on its Executive Committee. He was also a member of the Institute of Management Accountants, the American Institute of Certified Public Accountants, and the Financial Executives Institute.

Professor James D. Edwards, PhD , DHC, CPA J. M. Tull Professor Emeritus of Accounting in the Terry College of Business at the University of Georgia. He is a graduate of Louisiana State University and has been inducted into the Louisiana State University Alumni Federation's Hall of Distinction. He received his MBA from the University of Denver and his PhD from the University of Texas and is a CPA in Texas and Georgia. He has served as a professor and chairman of the Department of Accounting and Financial Administration at Michigan State University, a professor and dean of the Graduate School of Business Administration at the University of Minnesota, and a Visiting Scholar at Oxford University in Oxford, England.

Professor Edwards is a past president of the American Accounting Association and a past national vice president and executive committee member of the Institute of Management Accountants. He has served on the board of directors of the American Institute of Certified Public Accountants and as chairman of the Georgia State Board of Accountancy. He was an original trustee of the Financial Accounting Foundation, the parent organization of the FASB, and a member of the Public Review Board of Arthur Andersen & Co.

Professor Michael W. Maher, PhD , CPA Professor of management at the University of California at Davis. He is a graduate of Gonzaga University (BBA) and the University of Washington (MBA, PhD). Before going to the University of California at Davis, he taught at the University of Michigan and the University of Chicago. He also worked on the audit staff at Arthur Andersen & Co. and was a self-employed financial consultant for small businesses while attending graduate school.

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Accounting Principles

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What are Accounting Principles?
Historical Cost Principle
Revenue Recognition Principle
Matching Principle
Full Disclosure Principle
Cost Benefit Principle
Conservatism Principle
Objectivity Principle
Consistency Principle
Monetary Unit Assumption
Periodicity Assumption
Business Entity Concept
Going Concern Concept
Materiality Concept
Industry Practices Constraint

Why Are Accounting Principles Important?

What is the purpose of accounting principles.

Definition: Accounting principles are the building blocks for GAAP . All of the concepts and standards in GAAP can be traced back to the underlying accounting principles. Some accounting principles come from long-used accounting practices where as others come from ruling making bodies like the FASB .

It’s important to have a basic understanding of these main accounting principles as you learn accounting. This isn’t just memorizing some accounting information for a test and then forgetting it two days later. These principles show up all over the place in the study of accounting. Trust me. After you know the basic accounting principles, most accounting topics will make more sense. You will be able to reference these principles and reason your way through revenue, expense, and any other combination of problems later on in the study course.

List of 10 Basic Accounting Principles

Here’s a list of more than 5 basic accounting principles that make up GAAP in the United States. I wrote a short description for each as well as an explanation on how they relate to financial accounting.

Accrual Principle
Economic Entity Principle

Historical Cost Principle – requires companies to record the purchase of goods, services, or capital assets at the price they paid for them. Assets are then remain on the balance sheet at their historical without being adjusted for fluctuations in market value.

Revenue Recognition Principle – requires companies to record revenue when it is earned instead of when it is collected. This accrual basis of accounting gives a more accurate picture of financial events during the period.

Matching Principle – states that all expenses must be matched and recorded with their respective revenues in the period that they were incurred instead of when they are paid. This principle works with the revenue recognition principle ensuring all revenue and expenses are recorded on the accrual basis.

Full Disclosure Principle – requires that any knowledge that would materially affect a financial statement user’s decision about the company must be disclosed in the footnotes of the financial statements. This prevents companies from hiding material facts about accounting practices or known contingencies in the future.

Cost Benefit Principle – limits the required amount of research and time to record or report financial information if the cost outweighs the benefit. Thus, if recording an immaterial event would cost the company a material amount of money, it should be forgone.

Conservatism Principle – accountants should always error on the most conservative side possible in any situation. This prevents accountants from over estimating future revenues and underestimated future expenses that could mislead financial statement users.

Objectivity Principle – financial statements, accounting records, and financial information as a whole should be independent and free from bias. The financial statements are meant to convey the financial position of the company and not to persuade end users to take certain actions.

Consistency Principle – all accounting principles and assumptions should be applied consistently from one period to the next. This ensures that financial statements are comparable between periods and throughout the company’s history.

List of Key Accounting Assumptions

Here is a list of the key accounting assumptions that make up generally accepted accounting principles:

Monetary Unit Assumption – assumes that all financial transactions are recorded in a stable currency. This is essential for the usefulness of a financial report. Companies that record their financial activities in currencies experiencing hyper-inflation will distort the true financial picture of the company.

Periodicity Assumption – simply states that companies should be able to record their financial activities during a certain period of time. The standard time periods usually include a full year or quarter year.

Fundamental Accounting Concepts and Constraints

Here is a list of the four basic accounting concepts and constraints that make up the GAAP framework in the US.

Business Entity Concept – is the idea that the business and the owner of the business are separate entities and should be accounted for separately. This concept also applies to different businesses. Each business should account for its own transactions separately.

Going Concern Concept – states that companies need to be treated as if they are going to continue to exist. This means that we must assume the company isn’t going to be dissolved or declare bankruptcy unless we have evidence to the contrary. Thus, we should assume that there will be another accounting period in the future.

Materiality Concept – anything that would change a financial statement user’s mind or decision about the company should be recorded or noted in the financial statements. If a business event occurred that is so insignificant that an investor or creditor wouldn’t care about it, the event need not be recorded.

Industry Practices Constraint – some industries have unique aspects about their business operation that don’t conform to traditional accounting standards. Thus, companies in these industries are allowed to depart from GAAP for specific business events or transactions.

Generally Accepted Accounting Principles are important because they set the rules for reporting and bookkeeping. These rules, often called the GAAP framework, maintain consistency in financial reporting from company to company across all industries.

Remember, the entire point of financial accounting is to provide useful information to financial statement users. If everyone reported their financial information differently, it would be difficult to compare companies. Accounting principles set the rules for reporting financial information, so all companies can be compared uniformly.

The purpose of accounting principles is to establish the framework for how financial accounting is recorded and reported on financial statements. When every company follows the same framework and rules, investors, creditors, and other financial statement users will have an easier time understanding the reports and making decisions based on them.

Accounting & CPA Exam Expert

Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.

Financial Accounting Basics
Qualitative Characteristics
Accounting Relevance
Accounting Reliability
Accounting Comparability
Accounting Consistency
Accounting Cycle
Financial Statements
Financial Ratios

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