This article mentions five major advantages associated with the proper use of accounting concepts and principles. First, accounts prepared in accordance with generally accepted accounting principles and concepts are more accurate and reliable. Second, the users of financial statements attach greater credibility to statements prepared in accordance with generally accepted accounting principles. Hence, if a business wishes to win the confidence of banks, lenders, or major suppliers, it must follow these principles when preparing its accounting statements. Third, companies often find it useful to compare their performance with other organizations in the same business. No comparison would be meaningful (or possible) unless all the accounting statements are prepared using the same agreed-on principles and assumptions. Fourth, following laid down rules makes the job of an accountant easier. Accountants are spared the trouble of having to make subjective decisions. For example, having a standard policy about what is defined as material for the purpose of recording expenses or capitalization can save a lot of hassle for accounting staff. Once the organization limit is set, it makes accounting much simpler. Finally, following accounting concepts, principles and standards may not be a matter of choice. In most countries, the law prescribes that businesses that are operating at a certain level must follow them. Similarly, most professional or trade associations require their members to follow these standards as a matter of essential requirement for continued membership. Also, lenders often refuse to lend funds to businesses whose accounts are not in accordance with standards.
Advantages of Adhering to Accounting Concepts and Principles FAQs
Concepts in accounting are the common ideas about transactions that are used to study all the possible effects of an economic event. Principles are techniques or procedures that can be applied when difficult situations arise.
There is no clear demarcation line. The concepts are more general and broad, while principles are narrower since they allow no alternative solutions.
The concept of revenue is a good example of an accounting concept. Revenue is the income that arises from selling goods and rendering services. Another major accounting concept is the matching principle, which requires that expenses should be matched with the revenue that they generate.
The accrual principle is an example of a major Accounting Principle. Under this principle, income should be recognized as soon as it is earned and expenses should be recorded when incurred. Another important Accounting Principle relates to conservatism which states that assets should be recorded at their historic cost.
Accounting concepts provide the general framework in which Financial Statements are prepared. Principles provide the rules for applying these concepts when preparing Financial Statements.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
