Matching Principle & Other Principles
Generally Accepted Accounting Principles (GAAP) is a collection of methods used to process, prepare and present public accounting information. It is a term used to refer to the standard framework of guidelines for financial accounting. The following are some of the basic accounting principles and guidelines, stipulated by GAAP.
1. Matching Principle:
This accounting principle requires companies to use the accrual basis of accounting. The matching principle requires that expenses be matched with revenues.
Example: If the employees have to be paid for products manufactured and sold in a particular month, their wages and salaries should also be recorded as expense in the same month irrespective of whether cash is paid during the month or have been accrued.
2. Economic Entity Assumption:
The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner's personal transactions
3. Monetary Unit Assumption:
Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars are recorded.
4. Time Period Assumption:
This accounting principle assumes that it is possible to report the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five months ended May 31, 2009, or the 5 weeks ended May 1, 2009
5. Cost Principle
The term "cost" refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts. Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset amount does not reflect the amount of money a company would receive if it were to sell the asset at today's market value. (An exception is certain investments in stocks and bonds that are actively traded on a stock exchange.)
6. Full Disclosure Principle
If certain information is important to an investor or lender using the financial statements, that information should be disclosed within the statement or in the notes to the statement. It is because of this basic accounting principle that numerous pages of "footnotes" are often attached to financial statements.
7. Going Concern Principle
This accounting principle assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future. If the company's financial situation is such that the accountant believes the company will not be able to continue on, the accountant is required to disclose this assessment. The going concern principle also allows the company to defer some of its prepaid expenses until future accounting periods.
8. Revenue Recognition Principle
Under the accrual basis of accounting (as opposed to the cash basis of accounting), revenues are recognized as soon as a product has been sold or a service has been performed, regardless of when the money is actually received
9. Materiality
Because of this basic accounting principle or guideline, an accountant might be allowed to violate another accounting principle if an amount is insignificant. Professional judgement is needed to decide whether an amount is insignificant or immaterial. Because of materiality, financial statements usually show amounts rounded to the nearest dollar, to the nearest thousand, or to the nearest million dollars depending on the size of the company.
10. Conservatism
If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount. The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains.
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