What is financial accounting? Principles and Practices

Financial accounting in an industry is responsible for laying down rules. It manages various processes happening in the business. With the help of financial accounting, financial records are maintained. A financial accountant prepares books and records to operate the business smoothly. 

The principle of accounting is to set guidelines that corporations must follow when recording financial data. These rules help to regulate financial data by standardising the terms. Financial accounting helps you know if you require personal loans to grow. According to Investopedia, the International Financial Reporting Standards are the most widely used set of accounting principles, with adoption in 168 jurisdictions.

Key Takeaways

• The quality of financial information is enhanced because of the accounting standards that are laid by the company.
• The Financial Accounting Standards Board (FASB) issues accepted accounting principles (GAAP).
• GAAP is needed for all publicly traded companies. 
• GAAP is implemented by most non-publicly traded companies.
• The International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS).

Understanding Accounting Principles

Accounting principles aim to ensure that a company’s financial statements are complete. The principles of accounting must ensure thorough consistency and be comparable.

It helps investors to efficiently assess and use information from the company’s financial statements. These financial statements usually include trend data over some time. With accounting principles, the comparison of financial information across companies gets easier. It promotes transparency, preventing the risks of fraud.

You can compare the financial statements of various companies at once. It helps to review if the accounting principles are strictly followed or not. Accounting information is not absolute or concrete. The financial standards are created to minimise the negative effects of inconsistent data.

Without these guidelines, comparing financial statements among companies is difficult. Inconsistencies and errors would be tough to check in the absence of accounting principles.

What Are the Basic Accounting Principles?

Some of the most generic accounting principles are enlisted as the following:

• Accrual principle
• Conservatism principle
• Consistency principle
• Cost principle
• Economic entity principle
• Full disclosure principle
• Going concern principle
• Matching principle
• Materiality principle
• Monetary unit principle
• Reliability principle
• Revenue recognition principle
• Time principle

The revenue recognition principle and matching principle are the most significant rules. The materiality principle is responsible for the completeness of the financial data. Thus, the material transactions are accounted for in the financial statements. Consistency must be maintained in a company’s use of accounting principles.

When accounting principles allow a choice among multiple methods, a company should apply the same accounting method over time or disclose the change in its accounting method in the footnotes of the financial statements. Financial accounting is the tracking and recording of an organisation’s financial transactions. 

For example, Reliance Industries prepares annual financial statements that detail its income, expenses, assets, and liabilities. These reports follow Indian Accounting Standards (Ind AS). The accounting principles include consistency, relevance, and accuracy. Practices such as double-entry bookkeeping and periodic auditing promote the company’s financial health. Following such practice ensures transparency for stakeholders like investors and regulators.

What Are Some Critiques of Accounting Principles?

As every coin has two sides, there are certain negative aspects related to accounting. It is believed that companies get too much freedom in their work. This, however, hampers the transparency of the company’s financial data. When the companies do not follow laid-out rules, their reporting may offer an inaccurate picture of their financial health.

Complex rules laid out in GAAP create unwanted complications. This would result in a delay in the preparation of financial statements. It is also believed that an unfair amount of resources is needed to comply with industry standards.

Conclusion

To sum it up briefly, following accounting principles helps a company regulate financial data. These practices help you to compare various companies easily and effectively.  With accounting principles and following guidelines set by GAAP, a company ensures consistency and transparency.