The entity might come to a situation where it is probably of winning the lawsuit. If these expenses are material to the financial statement and they are not recorded, then the potential investors who make their decision make their decision based on the financial statements that off these expenses could potentially make losses. This is to ensure that the liabilities are recognized in the financial statements and it is actually reflecting the current financial situation of the entity that probably makes a loss. If it does, the revenues might be overstated and lead users to make the wrong economic decision.įor example, the entity should recognize the expenses immediately in the financial statements if there is a probability that an entity might lose the lawsuit to its customers. This accounting principle requires the entity to record and recognize the liabilities and expenses in the financial statements as soon as possible when there is uncertainty about the outcome.Īnd the entity should not recognize assets or revenue in the financial statements if the outcome is not certain. The conservatism principle is concerned with the reliability of the Financial Statements of an entity for the benefit of users, especially in the areas of overstating the revenue and assets as well as understating the liabilities and expenses. This recognition will bring the complete picture to the users of financial statements about how much the maintenance expenses incurred during the period rather than just showing how much the payments are made for maintenance expenses during the period on a per cash basis. It provides a complete picture of sales during the period.Īnother example related to accrued expenses is that the maintenance expenses are recognized at the time that services consume by the entity rather than at the time that the entity paid to suppliers. Records and recognize the sales based on the accrual basis, the users could see all of the sales that the entity makes during the period for both credit sales and cash sales. The recognition is not only related to the cash flow like a cash basis where the revenues are recorded and recognized in the financial statements only when the cash is collected from the customers for the services or products that the entity sells to them.Īnd the expenses are recorded and recognized in the financial statements when the cash is an outflow from the entity.įor example, based on the accrual accounting principle, sales revenues from selling clothes are recognized where the right and obligation are transferred from seller to buyer even if the seller does not receive the payments from the buyer. This principle helps the users of financial statements to get the financial information that really reflected in the current financial status or the economic situation of the entity. The accrual accounting concept has required the revenues and expenses to be recorded and recognized in the entity’s financial statements when they are incurred rather than when cash is paid or received. In this article, we will explain the detail of most of the accounting principles that use to prepare financial statements: List of accounting principles: 1) Accrual Principle: Yet, in the near future, IFRS will replace the local GAAP and be the world-accepted accounting standard. Recommend Book for Accounting Principle: The book is written by Mike Piper, CPA, and got positive feedback from more than 370 readers.Įven if the accounting principles in one financial reporting standard to another are not much different, most investors still do not get comfortable when the investments are moved to a country where different accounting standards are required. Even though those accounting standards (local GAAP) vary from one country to another, the principles set out in the standards are in the same fashion.įor example, GAAP or IFRS is different in many areas but the principles that use in those standards are very much the same. Most of the accounting principles are also set in the accounting standard and well as frameworks. You may find out some of the accounting principles have been set out in the qualitative and quantitative characterization of information in IFRS. They are also used by the standard-setting body to develop accounting standards and frameworks. Accounting principles are the principle, concepts, basics, guidance, as well as rules that use by the accountant to prepare the financial statements of an entity.
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