The Principles of Accounting for Business Students (Research Paper Sample)

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Principles of Accounting
Abstract
There exist general rules and principles that govern the entire field of accounting. The general rules and concepts are commonly referred to as principles and guidelines of accounting. In the absence of these principles, accounting can become problematic. The principles of accounting form the basis for the operation of the Financial Accounting Standards Board. Generally speaking, the board uses these principles to set the guidelines for accounting rules and standards. In most instances, if a particular company decides to distribute its financial statements to the general public, there is a requirement that the same company generally follows the accepted accounting principles during the preparation of their statements. In addition to that, if a corporation’s stock is publicly traded, the law requires that the corporation’s financial statements be audited by independent accounts, who should be public accountants for that case. In essence, the company’s management and the public independent accountants should ensure that the financial statement prepared do certify the requirements if the principles of accounting.
Importantly, the general accepted accounting principles majorly consist of set rules that include the basic accounting principles and guidelines, standard rules adopted by Financial Accounting Standards Board and the generally accepted industry practices.
* Introduction
The general accounting principles are significant because they seem to standardize and attempt to regulate accounting assumptions, definitions and methods CITATION May37 \l 1033 (May). In fact, assumptions are that one company’s financial statements should march a different company in the same industry. However, there may be variations on the same due to the fact that those financial transactions over the years have become complex.
* Basic Accounting Principles
Understanding the generally accepted accounting principles lead one to understand better the accounting principles in exclusiveness. Having a good grasp of these accounting principles can be of significant help to accountants in general. For the general growth of a business enterprise application of the same in the accounts department is equally important.
1 Monetary unit assumption
The economic activity of any particular entity is measured in the United States dollar. In addition to that only transactions that are expressed in United States dollars should be recorded. Anything out of that scope should be treated with contempt and disregard. Due to this basic accounting principle, there is a general presumption that the United States dollar’s purchasing power has remained constant over lengthy time and has not fluctuated. As a result, accountants, in most cases, ignore the effects of inflation and, therefore, record the amounts. For instance, in an ideal situation, dollars from a 1970 transaction are shown with dollars from a 2016 transaction. Therefore, the US dollar monetary unit assumption is a pertinent accounting principle that should be understood for better accounting functions.
2 Economic Entity
Generally, an accountant keeps all of the business transactions belonging to a sole unit business separate from the owner’s personal transactions. For the purposes of the law a sole business unit and its owner are legally regarded as one entity. For accounting reasons, this general assumption is negated and therefore the owner and the business get considered as two separate entities.
3 Cost Principle
The term "cost”, from an accountant’s perception, refers to the amount spent when an item was obtained. The time when the item was purchased is disregarded and, therefore, whether an item was obtained last month or twenty years ago is not an issue worth giving attention. Due to thus fact, the amount that is usually shown on the financial statements is generally referred to as historical cost amounts. Notably, due to this principle of accounting, asset amounts are not adjusted upward for inflation reasons. In fact, as a general rule, asset amounts should not be adjusted to give a reflection of any type of increase in value CITATION Boa70 \l 1033 (Board). Due to that, an asset amount does not reflect the amount of money a corporation would get if it were to sell the asset at the moment's market value. A notable exception to this is an instance of certain investments in stocks and bonds which are actively traded on a stock exchange market. If an accountant wants to know the current value of a corporation's long-term assets, they will not get this kind information from a company's financial statements rather they need to find it elsewhere, maybe from third parties.
4 The Full Disclosure Principle
In instances where a certain piece of information is pertinent to a lender or investor using the financial statements, that kind information must be disclosed within the statement or at least in the notes to the statement. It is due to this primary accounting principle that many pages bearing numerous footnotes and related information are often attached to financial statements of that company. For instance, let's say a particular company is named in a lawsuit that demands a specific amount of money.
When the financial statements are prepared it becomes unclear whether the company will be able to win such a case or whether it will lose the case. As a result of these conditions, and because of the full disclosure principle, the case will be fully described in the notes of the financial statements of the company. As a requirement, a company is expected to list its significant accounting policies as the first note to in its financial statements.
5 Conservatism
If a situation comes whereby there are two alternatives for reporting an item, conservatism dictates that the accountant chooses an alternative that will result in reduced net income or less asset amount. Conservatism helps the accountant to make reasonable independent decisions that should be sound, of course. However, it does not direct accountants to be conservative. Accountants are usually expected to be unbiased and more objective CITATION Gra96 \l 1033 (Gray, Dave and Carol). The discretion given here should not be used by the accountant to advance their ulterior motives in the company’s activities.
6 Materiality
Materiality as a principle allows an accountant to violate another accounting principle if the subject amount is extremely insignificant. Allowing violation calls for professional judgment with regard to the need to decide whether an amount is really immaterial. An example of an obviously immaterial instance is the purchase ...