The Accounting Principles are the guidelines that regulate the way in which financial information is quantified, processed and communicated by accounting professionals, it can be said that, in some way, they constitute the regulatory law of the accountant.
What are they
In accounting literature they are often referred to as Generally Accepted Accounting Standards or Principles and are defined as follows:
They are a minimum convention of basic concepts and rules that must be observed when registering and reporting accounting, on matters and activities of natural or legal persons. (Granados, Latorre and Ramírez, p.17)
They are the general concepts and detailed practices of accounting. They cover all conventional standards, rules and procedures that constitute accepted accounting practice. (Horngren, Sundem and Elliott, p.148)
Generally accepted accounting principles regulate the financial accounting process, determining the information to be included, how it is organized, measured, combined and adjusted, and finally how it is presented in the financial statements. The principles reflect the objectives and basic characteristics of financial accounting. (IICA, p.40)
The accounting principles constitute the regulatory framework for accounting action, aiming at providing objectivity to the financial information reflected in the accounting statements, they represent a set of criteria and standards to be used in the process of capturing, measuring and representing the economic reality financial statement of the company, so that the financial statements reflect the true image of the equity at the end of the year under consideration, the results obtained in the period and the changes in the financial situation of the economic unit during said year. (Gómez-Juárez, p.112)
Which are
In each country, it is generally the local accountants' association that dictates the principles. Following those mentioned in the literature, it will be up to the reader to investigate which ones correspond to their scope of action.
Basic accounting principle:
Equity
Equity between opposing interests should be a constant concern in accounting, since those who use or use accounting data may find themselves faced with the fact that particular interests are in conflict. It follows that financial statements should be prepared in such a way as to fairly reflect the various interests at stake in a given company.
Accounting principles that identify and delimit the economic entity and its financial aspects:
Entity
The economic activity is carried out by identifiable entities, which constitute combinations of human resources, natural resources and capital, coordinated by an authority that makes decisions aimed at achieving the entity's purposes.
Accounting is interested in identifying the entity that pursues particular economic purposes and that is independent from other entities.
They are used to identify, in an entity, two criteria:
- Set of resources destined to satisfy some social need with its own structure and operation. Independent decision-making center with respect to the achievement of specific ends, that is, the satisfaction of a social need.
Therefore, the personality of a business is independent from those of its shareholders or owners and its financial statements should only include the assets, securities, rights and obligations of this independent economic entity. The entity can be a natural person or a legal person or a combination of several of them.
Common denominator currency
Financial statements reflect equity through a resource that is used to reduce all its heterogeneous components to an expression, which allows them to be easily grouped and compared. This resource consists of choosing a currency and valuing the assets by applying a price to each unit.
Accrued
The equity variations that must be considered to establish the economic result are those that correspond to a year without distinguishing whether they have been collected or paid during said period.
Accounting principles that establish the basis for quantifying the operations of the economic entity:
Accounting period
The need to know the operating results and the financial situation of the entity, which has a continuous existence, forces it to divide its life into conventional periods.
Operations and events as well as their derivative effects, which can be quantified, are identified with the period in which they occur, therefore any accounting information must clearly indicate the period to which it refers.
In general terms, costs and expenses must be identified with the income they originated, regardless of the date they are paid.
Original historical value
The transactions and economic events that the accounting quantifies are recorded according to the amounts of cash that are affected or its equivalent or the reasonable estimate that of them is made at the time they are considered carried out for accounting purposes.
These figures should be modified in the event of subsequent events that make them lose their meaning, applying adjustment methods in a systematic way that preserve the impartiality and objectivity of the accounting information.
If the figures are adjusted for changes in the general price level and are applied to all the concepts that may be modified that make up the financial statements, it will be considered that there has been no violation of this principle, however, this situation must be duly clarified in the information that is produced.
Business going
The entity is presumed to be in permanent existence unless otherwise specified, so the figures in its financial statements will represent historical values or modifications thereof, systematically obtained.
When the figures represent estimated settlement values, this should be clearly specified and will only be acceptable for general information when the entity is in liquidation.
Economic duality
It is made up of:
- The resources available to the entity to carry out its purposes and, the sources of said resources, which in turn, are the specification of the rights that exist over them, considered as a whole. The double dimension of accounting representation of the entity is essential for a proper understanding of its structure and relationship with other entities. The fact that modern registration systems appear to eliminate the arithmetic need to maintain equal positions and payments does not affect the dual aspect of the economic entity, considered as a whole.
Realization
Accounting quantifies in monetary terms the operations carried out by an entity with other participants in the economic activity and certain economic events that affect it.
The economic operations and events quantified by accounting are considered to have been carried out:
- When it has carried out transactions with other economic entities When internal transformations have taken place that modify the structure of resources or their sources When economic events external to the entity or derived from its operations have occurred and whose effect can be reasonably quantified in terms monetary.
Accounting principles applicable to financial statements:
Sufficient disclosure
The accounting information presented in the financial statements must contain in a clear and understandable way everything necessary to judge the results of the operation and the financial situation of the entity.
Prudence
It means that when you have to choose between two values for an asset item, you should normally choose the lower one, or else that an operation is accounted for in such a way that the owner's share is less. This general principle can also be expressed by saying: "count all losses when they are known and gains only when they have been realized." Exaggeration in the application of this principle is not convenient if it results in detriment to the fair presentation of the financial situation and the results of operations.
Relative importance
The information that appears in the financial statements must show the important aspects of the entity that can be quantified in monetary terms. Both for the purposes of the data entering the accounting information system and for the information resulting from its operation, the detail and multiplicity of the data must be balanced with the usefulness and purpose requirements of the information.
Consistency
The uses of accounting information require that quantification procedures be followed that last over time.
Objectivity
Changes in assets, liabilities and in the accounting expression of equity, must be formally recognized in the accounting records, as soon as it is possible to objectively measure them and express this measure in monetary terms.
What are they for?
Basically its objective is to serve as uniform or standard accounting technique methods for the preparation of financial statements.
The application of the accounting principles should lead to the annual accounts, clearly formulated, expressing the true image of the assets, the financial situation and the results of the company. (Gómez-Juárez, p.112)
Here is a short video that presents 15 generally accepted accounting principles.
Bibliography
- Gavelán Izaguirre, Jorge J. Generally accepted accounting principles: validity and application. UNMSM. Faculty of Accounting Sciences, 2000. Gómez-Juárez and Martínez-Pantoja, Andrés. Introduction to Financial Accounting: Practical Assumptions of Financial Accounting. Editorial Club Universitario, 2001. Granados, Ismael; Latorre, Leovigildo and Ramírez, Elbar. Management accounting. Fundamentals, principles and introduction to accounting: practical approach. National University of Colombia, 2007 IICA. Integrated finance, accounting and budget control system. Rules and Procedures Manual. Ministry of Agricultural Development, Panama. 1983 Robles Valdés, Gloria and Alcerreca Joaquín, Carlos. Administration: an interdisciplinary approach. Pearson Education, 2000
