Top Basic Accounting Principles
There are four basic accounting principles, four accounting
assumptions, and four accounting constraints in accounting rules
that businesses use to record and report their financial information.
These set of rules is called GAAP
(Generally Accepted Accounting
and are issued by the FASB (Financial Accounting Standards
GAAPS is the foundation we use to help in handling the
different accounting issues we face as business owners.
These rules are guidelines to help us make our financial presentations more consistent, comparable, meaningful, and informative.
4 Basic Accounting Principles:
- The Historical Cost Principle
principle states that we are required to record most of our assets at
their original costs with no adjustments for increases in market value.
This accounting principle makes sure we don’t put our own perceived
value on our assets.
- The Revenue Recognition Principle
This accounting principle is the basis for
It requires us to record revenue when the goods have been sold or the service has been provided.
- The Matching Principle
basic accounting principle requires us to use accrual accounting also. It
requires us to match our expenses with our revenues. A very common
example of this accounting principle is to report employees’ wages in
the week the employees worked not in the week they are paid.
- The Disclosure Principle
accounting principle requires us to disclose all pertinent financial
information about our business in an understandable form. This
information is presented in the main body of our financial statements,
in the footnotes of our financial statements, or as supplementary
Four Accounting Assumptions:
There would be no way to cover all the principles, assumptions, and
constraints that make up GAAPS on this one page, but I did want to
mention a few assumptions that I think are very important to our small
- The Business or Economic Entity Assumption
This assumption requires us as small business owners to keep all of our business transactions separate
from our personal transactions. One of the first things you should do
when you start your small business is open up a business checking
account and only use it to pay and record all of your business transactions.
- Monetary Assumption
This assumption requires us to record and present all business transactions in a monetary unit such as the dollar.
- Time Period Assumption
accounting principle assumes that all of our business operations can be
recorded and separated in to different time periods such as months,
quarters, and years.
- Going Concern Assumption
Assumes that our business will continue operating and will not be closed or sold in the foreseeable future.