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Accounting Principles

Accounting principles refer to the underlying rules, concepts, and standards that guide accountants in recording, classifying, and reporting financial transactions of a business or organization. These principles provide a framework for accountants to follow, ensuring consistency and comparability across different entities and periods. By adhering to accounting principles, businesses can maintain transparency, credibility, and trustworthiness with stakeholders, such as investors, creditors, and regulatory bodies.

The Five Accounting Principles​

The five fundamental accounting principles are:

1. Accounting Entity​

  • Each business entity is a separate economic unit.
  • Financial transactions of one entity should not be mixed or confused with those of another entity.

2. Going Concern​

  • Business will continue to operate for the foreseeable future.
  • Accounting records are prepared on the assumption that the business will remain operational in the long term.

3. Monetary Unit​

  • All financial transactions are recorded and expressed in terms of a common currency.
  • Financial statements reflect the economic reality of the business, rather than its political or social aspect.

4. Historical Cost​

  • Assets and liabilities are recorded at their original cost or value.
  • Subsequent changes in value are not reflected in the financial statements until realized through sale, disposal, or exchange.

5. Consistency​

  • Accounting principles and methods used must be consistent from one accounting period to another.
  • This ensures comparability of financial data across different periods and facilitates analysis by stakeholders.

The Accounting Equation​

The fundamental equation that underlies accounting is:

Assets = Capital + Liabilities

This equation represents the balance sheet, which shows the relationship between a business's assets, capital (also known as equity), and liabilities at a specific point in time.