Several key principles form the foundation of accounting:
Consistency Principle: Businesses should use the same accounting methods and procedures from period to period unless there is a justified reason to change them. Accrual Principle: Revenues and expenses are recorded when they are earned or incurred, not necessarily when cash is received or paid. This principle provides a more accurate picture of a company’s financial position. Conservatism Principle: When in doubt, accountants should choose the solution that results in lower profits or asset valuation. This principle aims to provide a realistic view of the company’s financial situation. Going Concern Principle: Assumes that a business will continue to operate indefinitely. This principle affects the valuation of assets and liabilities. Materiality Principle: Financial statements should disclose all information that could influence the decision-making of users. Insignificant data can be disregarded if it does not affect the overall understanding of the financial statements. Revenue Recognition Principle: Revenue is recognized when it is earned and realizable, regardless of when cash is received.