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Accounting is an integral part of every business regardless of business size. With modern day business requirements, business and accounting are simply inseparable. By recording all the financial transaction, accounting helps in determining the financial performance of the business by preparing financial statements. These financial statements are used by both internal stakeholders as well as external like investors, tax authorities, regulators, banks etc.
Now imagine, if each business prepares the financial statement in their own way, we all will have hundreds of thousands of financial statements formats trying to convey the same information. This becomes practically impossible for a business compare and read the other companies’ statements. As a result, financial data becomes unusable. Here is why Accounting principles helps to bridge the gap and aims to bring some level of uniformity in financial reporting.
Accounting principle refers to common rules or guidelines for accounting financial transactions and preparing financial statements. Accounting principles are the foundational guidelines for recording and preparing financial statements. The accounting principles are commonly referred to as ‘Generally Accepted Accounting Principles (GAAP).
Accounting principles helps to bring the uniformity in accounting and preparing financial statements and it is followed worldwide. The regulators and authorities of each country may have their own accounting principles like UK GAAP, USA GAAP, IFRS etc. but at the core, the fundamentals and objective of accounting principles remain the same.
Accounting principles, as a body of doctrines commonly associated with the theory and procedures of accounting, justify the current practice and financial reporting. You or your accountant may choose a method to account and prepare the financial statement while another accountant chooses a different method. Both can be said to be correct only if the accounting principles applied are acceptable and to be acceptable, it should satisfy the following conditions:
Accounting Principles involves accounting concepts and accounting conventions. For you to understand the accounting principles, you need to know these accounting concepts and conventions.
Let us first understand the accounting concepts as a first step to get the accounting principles right. Among the several accounting concepts, the following are some of the important.
After accounting concepts, the next important part of accounting principles is accounting conventions. Accounting conventions refers to a set of customs and traditions that guide the business in preparing the accounting statement. These conventions are derived by usage and practice. The following are the 4 accounting conventions:
In the end, the aim of accounting is to keep systematic records to ascertain financial performance and financial position of an entity and to communicate the relevant financial information to the interested user groups.
The accounting financial statements are basic means through which the management of an entity makes public communication of the financial information along with selected quantitative details. And such quantitative details could well be maintained with help of ERP Systems such as Tally.ERP 9 following the Accounting Principles laid by statutory organizations.
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