| Accounting principles are the basic | | | | can be made that might overstate or |
| assumptions, rules of operation, and | | | | understate figures; and, what information |
| essential characteristics that make up the | | | | should be disclosed so that the reader will |
| framework for the construction of accounting | | | | fully understand the circumstances under |
| financial statements. | | | | which the information is being presented. |
| | | | |
| Long ago, I was perplexed to discover that | | | | There are also basic assumptions that the |
| there was no "set" of accounting principles | | | | reader can count on, such as: the information |
| that was presented in one form such as you | | | | is related to the business entity only and |
| might find in the Bill of Rights. This is not | | | | doesn't have any unrelated information mixed |
| to say that the principles are incomplete or | | | | in; the business is a going concern and won't |
| vague, it only means that the definitions of | | | | cease operations soon; the financial |
| accounting principles can be presented in | | | | information presented is measured in specific |
| various formats, which may lead to confusion | | | | time intervals such as a month, quarter or |
| for some people, especially beginners. | | | | year; the financial information is using a |
| | | | certain unit of measure such as dollars, not |
| Be that as it may, accounting principles are | | | | board feet, etc.; the information is |
| absolutely necessary when preparing financial | | | | presented at historical cost, i.e., when |
| statements, just as the rules of a particular | | | | received, paid, or incurred; and, the method |
| card game make the card game possible in the | | | | of accounting being used is double-entry and |
| first place. Accounting principles are like | | | | not some other method. |
| the glue that holds the accounting process | | | | |
| together. For example, financial statements | | | | These are accounting principles as opposed to |
| have an overall objective, which is to | | | | accounting standards. An accounting standard |
| provide the user of the statements a useful | | | | is an agreement as to how an accounting issue |
| tool for making business decisions. | | | | will be treated. For instance, a standard |
| | | | might state what type of inventory system is |
| In order to be useful, the accounting | | | | appropriate to use for a certain type of |
| information must have certain | | | | business; how capital leases should be |
| characteristics, such as being dependable and | | | | recorded; how many years intangible assets |
| practical. To be dependable, the accounting | | | | should be amortized; what methods of |
| information must be unbiased, accurate, and | | | | depreciation should be used, and so on. There |
| verifiable. To be practical, accounting | | | | are literally thousands of accounting |
| information must be predictable, prepared in | | | | standards that have been issued over the |
| a timely fashion, and be able to provide | | | | years. These standards are constantly being |
| meaningful feedback. Additional | | | | revised or discarded as they become outdated. |
| characteristics are that the accounting | | | | |
| information must be consistent, comparable, | | | | If you want to play the accounting "game of |
| serve a utilitarian need (such as cost | | | | cards", you must become familiar with the |
| benefit), and make a material difference. | | | | "rules of the game", which are accounting |
| | | | principles and standards. If you choose to |
| Besides characteristics, certain operational | | | | not play by the rules, you do so at your own |
| rules are established as to when revenue and | | | | peril, as we have seen recently in the U.S. |
| expenses are reported; how expenses are | | | | corporate accounting scandals. |
| matched to revenue; what to do when a choice | | | | |