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