Accounting principles are the basic assumptions, rules for how things work, and important qualities that make up the framework for how accounting financial statements are made.
Long ago, I was surprised to learn that there was no "set" of accounting principles, like the Bill of Rights, that was presented in one way. This doesn't mean that the accounting principles aren't complete or clear; it just means that their definitions can change.
Accounting principles are the basic assumptions, rules for how things work, and important qualities that make up the framework for how accounting financial statements are made.
Long ago, I was surprised to learn that there was no "set" of accounting principles, like the Bill of Rights, that was presented in one way. This doesn't mean that the principles aren't clear or complete; it just means that the definitions of accounting principles can be given in different ways, which may confuse some people, especially those who are just starting out.
No matter what, accounting principles are needed to make financial statements, just like the rules of a card game make the game possible in the first place. The accounting process is held together by the accounting principles. For example, the main goal of financial statements is to give the people who use them a useful tool for making business decisions.
For accounting information to be useful, it needs to have certain qualities, like being reliable and useful. For accounting information to be reliable, it must be fair, correct, and easy to check. Accounting information needs to be predictable, ready on time, and able to give useful feedback in order to be useful. Accounting information must also be consistent, comparable, serve a utilitarian purpose (like cost/benefit analysis), and make a real difference.
In addition to the characteristics, there are rules about when revenue and expenses should be reported, how expenses should be matched to revenue, what to do when a choice could overstate or understate figures, and what information should be shared so that the reader can fully understand the context in which the information is being presented.
There are also basic assumptions that the reader can count on, such as: the information is only about the business entity and doesn't include any unrelated information; the business is a going concern and won't stop operating soon; the financial information is measured in specific time intervals, such as a month, quarter, or year; the financial information is measured in a specific unit of measure, such as dollars and not board feet, etc.; and the information is accurate.
This is not a set of accounting standards, but a set of accounting principles. A standard in accounting is an agreement about how to handle a certain accounting issue. For example, a standard might say what type of inventory system is best for a certain type of business, how capital leases should be recorded, how many years intangible assets should be amortised over, what methods of depreciation should be used, and so on. Over the years, thousands upon thousands of accounting standards have been put out. As these standards get old, they are always being changed or thrown out.
If you want to play the "card game" of accounting, you need to know the "rules of the game," which are the principles and standards of accounting. As the recent U.S. corporate accounting scandals have shown, if you don't follow the rules, you do so at your own risk.
