Generally accepted accounting principles refers to a cluster of accounting standards that summarize the accounting records into financial statements and reveal specific information on accounting records. These principles allow companies to compare their financial records with organizations using a common set of rules.
Exchange price principle
The exchange price principle is also known as cost principle. This principle dictates that organizations must keep a historical record of the cost of assets acquired. These costs are used to determine the fair market value of assets by valuing the items based on the time of purchase. However, these real values tend to change over the course of time mainly due to inflation and recession.
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Revenue recognition principle
The revenue recognition principle is a revenue that is recorded after the substantial completion of the earning process. The principle also states that companies should reveal their income and expenses in the same time period in which they are accrued. This means that the earning process can only occur after production of evidence mainly in the form of cash receipts or invoices of the total amount of revenue earned.
Matching principle
The matching principle states that the income statement of a company must include a record of the expenses incurred during the period in which revenues were generated. It acknowledges that revenue generation processes give rise to expenses hence for every debit there should be a credit and vice versa. Similarly, the revenue should subsequently be corresponding against the matching expenses incurred during the accounting period, despite the expenses not being paid for.
Gain and loss recognition principle
Gains identify and represent income that was not earned through the company’s operating activities but through the sale of assets. Gains of a company directly have an impact on a company’s balance sheet and an income statement hence affects the revenue. On the other hand, losses are similar to gains because they are both recognized on the income statement only when an asset is sold and a loss is incurred. However, the down side of this is that, the sale of an asset can never be greater than the original cost.
Full disclosure principle
The full disclosure principle refers to the factual materials of financial state and operating results of a business or organization. This principle dictates that the material fact should be disclosed as part of the financial statement. This approach ensures that the financial reports are transparent, reliable, and self-explanatory; thus, allows stakeholders to facilitate the decision-making processes based on the financial information acquired. Moreover, the full disclosure principle protects an organization from unnecessary costly lawsuits.
