There are generally accepted accounting principles (GAAP) that govern the field of accounting. These accounting principles are important guidelines and frameworks on which accounting rules are based. The following is the 9 important accounting principles: 

1. Economic Entity Principle

An accountant must account for ness transactions separately from business owners’ transactions. Each business is an economic entity, and therefore, its performance should be measured independently from the transactions of the business owner. While large corporations follow strictly this principle, small-business owners often account for their personal expenses as business expenses in order to take advantage of business income tax savings. This is a tricky thing, that as long as they can prepare sufficient supporting documents, they will claim the expenses as the entity’s expenses

2. Historical Cost Principle

One of the easiest ways to ensure the accountant will not manipulate the financial statements is to require them to record business transactions on historical cost convention. This means that the assets and liabilities will not be adjusted for inflation/ fair value. The assets must be recorded at the amount that the entity paid out to acquire them.

For example, if a company buys a truck for USD 30.000, they must account for the truck’s cost as USD30.000 regardless if a week later, the truck price goes down to USD 28.000. The same principle applies when a company buys land of USD200.000. 10 years later, the land price goes up to USD300.000. They must not recognize the USD100.000 increase unless certain conditions are met (i.e., hen the company is going to bankruptcy and needs a fair valuation of its assets).

3. Going-Concern Principle

This accounting principle has a close relationship with historical cost principles. It assumes that a company will continue as a going concern for the foreseeable future (normally, the assessment period is of 12 months as the next assessment will be performed in the subsequent year). This is the precondition that the assets are recognized on the historical cost convention. If the company does not continue as a going concern, the financial statements must be prepared on a break-up basis where assets and liabilities are measured at market value (fair value).

4. Matching Principle

The matching principle requires the Company to account for expenses to be matched with income in the same period. For example, if you work in a life insurance business, you sell an insurance policy for 10 years and collect the premium in year 1. The company must estimate related expenses (i.e. claim) and recognize them to match with the premium income. The fact is that the company will have to spread the income over the 10 years as well as expenses. The expense is recognized to match with income, whether the claim happened or not.

5. Revenue Recognition Principle

You may have concerned whether the business will recognize the income if expense has incurred? The answer is NO. The matching accounting principle requires expenses to match with income but not the other side. Revenue has its own criteria for recognition. If the business sells goods, they should only recognize income when significant of risk and reward-related to the good has been transferred to the customers.

Generally, the revenue will be recognized when the good has been sold or a service has been performed, regardless of when the money is received. This happens when the car dealer sold you a car on credit, they must account for the full value of the car (i.e. $20.000) as income even you only need to pay 5.000 in the first year.

6. Consistency Principle

The accountant must be consistent in applying accounting principles and practices. The company should not change the accounting practices regularly if it impacts the financial statements. For example, if a company applies the straight-line depreciation method, it should apply this method consistently at least within one business cycle (or one financial year). The change to this method within one financial year will mislead the users of financial statements

7. Materiality Principle

Materiality is a threshold where the misstatement will impact the decision of users. for instance, most of us will think that $10 will not be material; some people will think that $1.000 is quite material, but it will not be the case in a business with million-dollar assets. An auditor often bases on total assets/ or profit before tax (maybe 5%) to set a threshold for overall materiality of the whole financial statements. The accountant does differently and eventually has a much smaller threshold when doing daily bookkeeping. By the end of the day, we all are human, and we are not perfect. An accountant will make mistakes that are obviously true. This accounting principle accepts mistakes, misstatements, as long as they are not material.. Conservative Principle

8. Conservation Principle

The conservatism principle is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received. Thus, when given a choice between several outcomes where the probabilities of occurrence are equally likely, you should recognize that transaction resulting in a lower amount of profit, or at least the deferral of a profit. Similarly, if a choice of outcomes with similar probabilities of occurrence will impact the value of an asset, recognize the transaction resulting in a lower recorded asset valuation.

9. Monetary Unit Principle

Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars are recorded. Because of this basic accounting principle, it is assumed that the dollar’s purchasing power has not changed over time. As a result, accountants ignore the effect of inflation on recorded amounts.