Accounting Principles 1, 2, and 3
Basic accounting principles are generally held and regulated under Generally Accepted Accounting Principles (GAAP). The Financial Accounting Standards Board (FASB) also provides rulings and general practices with regard to these accounting principles. Some of these principles of accounting also contain underlying concepts or methods that may be used as it pertains to that company’s particular industry or business venture. Accounting Principles 1, 2, and 3 include the following:
- Reliability Principle
- Comparability Principle
- Cost Principle
Also known as the Objectivity Principle, this basic accounting principle requires that all companies provide accounting information that is without significant error or bias. The reliability principle is generally required for publicly traded corporations under the Securities Exchange Act of 1934.
The comparability principle is based off the idea that information is much more useful if the firm establishes a certain standard or benchmark and it’s general competition. There are generally two guidelines that firms should follow when using the comparability principle:
1) The first of these is the requirement that accounting information remain comparable from business to business. This is generally performed when companies register with different exchanges. Different exchanges generally have accounting concepts and principles like an accounting concept such as the Stable-Monetary Unit or basic accounting principles such as GAAP or IFRS so information is easily read and readily comparable to other companies in the market.
2) The second part is the requirement that any single businesses’ statements or reports be comparable from one period to the next. Generally speaking when a company adopts a certain method or a principle of accounting, it must remain with that accounting basic from quarter to quarter and year to year.
The Cost Principle generally states to record assets and services at their purchase or historical cost. This is one accounting concept principle that allows for more conservative valuations under the concept of conservatism. This also provides more meaningful statements. There is not a requirement for accountants to mark all assets to the market.
To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.