standard rules of accounting

Accounting is the process of recording, classifying, summarizing and interpreting financial transactions of a business or organization. In order to ensure accuracy and consistency in financial reporting, accounting is governed by a set of standard rules known as Generally Accepted Accounting Principles (GAAP). In this article, we will outline the standard rules of accounting in a point-wise manner.

1. Entity Concept: This concept states that a business or organization is separate and distinct from its owners or stakeholders. This means that all financial transactions related to the business should be recorded separately from personal transactions of the owners.

2. Cost Concept: According to this concept, all assets and liabilities of a business should be recorded at their historical cost or acquisition cost. This means that the cost at which an asset was purchased should be recorded in the financial statements rather than its current market value.

3. Going Concern Concept: This concept assumes that a business will continue to operate in the foreseeable future. This means that financial statements should be prepared on the assumption that the business will continue to operate and not be liquidated or sold.

4. Dual Aspect Concept: This concept states that every transaction has two aspects – a debit and a credit. This means that for every transaction, there must be at least two accounts affected, and the total amount debited must be equal to the total amount credited.

5. Matching Concept: According to this concept, expenses should be matched with the revenue they generate in the same accounting period. This means that expenses related to a particular revenue should be recorded in the same period as the revenue.

6. Accrual Concept: The accrual concept requires that revenues and expenses be recognized when they are earned or incurred, regardless of when the cash is received or paid. This means that revenue should be recorded when it is earned, even if payment has not been received, and expenses should be recorded when they are incurred, even if payment has not been made.

7. Materiality Concept: This concept states that only significant or material items should be recorded in the financial statements. This means that small or insignificant transactions can be omitted from the financial statements.

8. Consistency Concept: This concept requires that accounting methods and procedures should be consistent from one accounting period to another. This means that a business should use the same accounting policies and procedures each year to ensure that the financial statements are comparable.

9. Conservatism Concept: According to this concept, accountants should be conservative in their treatment of uncertain or doubtful items. This means that losses should be recognized immediately, even if there is only a possibility of them occurring, while gains should only be recognized when they are certain.

10. Full Disclosure Concept: The full disclosure concept requires that all material information related to a business should be disclosed in the financial statements. This means that all significant transactions, events and circumstances should be disclosed, even if they do not affect the financial position of the business.

11. Objectivity Concept: The objectivity concept requires that accounting transactions should be supported by objective evidence. This means that all transactions should be supported by documentation such as invoices, receipts, and contracts.

12. Time Period Concept: The time period concept requires that financial statements should be prepared at regular intervals, usually annually, to provide timely and relevant information to stakeholders.

13. Monetary Unit Concept: According to this concept, financial transactions should be recorded in a common unit of measurement, usually a currency such as the US dollar, Euro or Pound Sterling.

14. Consistency Principle: The consistency principle states that a business should use the same accounting methods and procedures for similar transactions from one accounting period to another. This ensures that financial statements are comparable from one year to another.

15. Revenue Recognition Principle: According to the revenue recognition principle, revenue should be recognized in the accounting period in which it is earned. This means that revenueshould be recorded when it is realized or realizable, and earned, regardless of when payment is received.

16. Expense Recognition Principle: The expense recognition principle, also known as the matching principle, requires that expenses should be recognized in the accounting period in which they are incurred, rather than when they are paid. This ensures that expenses are matched with the revenues they generate in the same accounting period.

17. Historical Cost Principle: The historical cost principle requires that assets and liabilities be recorded at their original cost, rather than their current market value. This ensures that the financial statements reflect the original cost of assets and liabilities at the time of acquisition.

18. Materiality Principle: The materiality principle requires that financial statements should include all significant or material items, while immaterial items can be excluded. This ensures that the financial statements provide relevant and reliable information to stakeholders.

19. Consistency Principle: The consistency principle requires that accounting methods and procedures should be consistent from one accounting period to another. This ensures that financial statements are comparable from one year to another.

20. Conservatism Principle: The conservatism principle requires that accountants should be conservative in their treatment of uncertain or doubtful items. This ensures that losses are recognized immediately, even if there is only a possibility of them occurring, while gains are only recognized when they are certain.

21. Full Disclosure Principle: The full disclosure principle requires that all material information related to a business should be disclosed in the financial statements. This ensures that stakeholders have access to all relevant information that could affect their decision-making.

22. Objectivity Principle: The objectivity principle requires that accounting transactions should be supported by objective evidence. This ensures that transactions are reliable and can be verified by external parties.

23. Time Period Principle: The time period principle requires that financial statements should be prepared at regular intervals, usually annually, to provide timely and relevant information to stakeholders.

24. Monetary Unit Principle: The monetary unit principle requires that financial transactions should be recorded in a common unit of measurement, usually a currency such as the US dollar, Euro or Pound Sterling.

25. Industry-Specific Principles: In addition to the above principles, there may be industry-specific accounting principles that apply to certain types of businesses, such as those in the healthcare, real estate or financial industries.

In conclusion, the standard rules of accounting provide a framework for accurate and consistent financial reporting. These principles ensure that financial statements are reliable, relevant and comparable from one accounting period to another, providing stakeholders with the information they need to make informed decisions about a business.