Each economic entity must keep separate financial records. Economic entities, including enterprises, governments, school districts, churches and other social organizations. Although accounting information from many different entities can be combined for financial reporting, every economic activity must be associated with a specific entity and recorded. In addition, business records must not include the owner's personal assets or liabilities.
Monetary unit hypothesis
The accounting records of an economic entity only include measurable transactions. Some economic activities that affect the company, such as hiring a new CEO or launching new products, are not easily quantified as monetary units, so they will not appear in the company's accounting records. In addition, accounting records must be recorded in a stable currency. For this reason, American companies usually use dollars.
The principle of full publicity
Financial statements usually provide information about the company's past performance. However, ongoing lawsuits, unfinished transactions or other circumstances may have an imminent and significant impact on the company's financial situation. The principle of full disclosure requires that financial statements include disclosure of such information. Complement the financial statements with footnotes to convey this information and explain the company's policy of recording and reporting business transactions.
Time cycle hypothesis
Most enterprises have existed for a long time, so it is necessary to report the results of business activities within an artificial time period. Depending on the type of report, the time period used can be one day, one month, one year or any other arbitrary time period. The artificial time period leads to the problem of how to record some transactions. For example, how should accountants report the cost of equipment that can be used for five years? Reporting all expenses in the year of purchase may make the company unprofitable this year and unreasonable profits in the following years. Once the accounting period is determined, accountants use generally accepted accounting principles to record and report the transactions during the accounting period.
Accrual accounting
In most cases, generally accepted accounting principles stipulate that accrual accounting should be adopted instead of cash basis accounting. Accrual accounting follows the principles of revenue recognition, inspection and cost discussed below. When economic activities occur during the accounting period, whenever cash changes hands, it should be recorded in the financial aspect. According to the basic accounting of cash, when a company receives cash or equivalent, it is counted as income, and when it pays cash or equivalent, it is counted as expense.
Revenue recognition principle
It is recognized as income when products are delivered or services are completed, regardless of the specific time of cash flow. Suppose the store ordered 500 computer CDs from wholesalers in March, received them in April and paid them in May. Wholesalers confirm sales revenue when they deliver goods in April, not when the transaction is completed in March or when cash is received in May. Similarly, if a lawyer receives an engagement fee of 65,438+000 yuan from a client, the Ministry of Justice will not confirm the income of this money until he or she actually provides services of 65,438+000 yuan to the client.
Matching principle
The cost of doing business is recorded in the same period when revenue is generated. For example, expenses include the cost of selling goods, wages and commissions, insurance premiums, used supplies and estimated potential warranty work for selling goods. Suppose the wholesaler delivered 500 CDs to the store in April. When revenue is recognized, these CDs change from assets (inventory) to expenses (cost of goods sold), thus determining profits.
Cost principle
An asset is recorded as a cost, equal to its value at the time of acquisition. In the United States, even if assets such as land or buildings increase in value over time, they will not be revalued in financial reports.
Principles of sustainable management
Unless otherwise stated, the financial statements are prepared on the assumption that the company will continue to operate indefinitely. Therefore, assets do not need to be sold at the clearance price, and debts do not need to be paid in advance. This principle leads to the division of assets and short-term into short-term (current) and long-term assets, which are expected to occupy more than one year. Long-term liabilities will not mature within one year.
Relevance, reliability and consistency
To be effective, financial information must be relevant and reliable, and must be written in a consistent way. Relevant information helps decision makers to understand the company's past performance, current situation and future prospects, so that decision makers can make timely decisions. Of course, each user may need different information, so it is necessary to present information in different formats. Internal users often need more detailed information than external users, while external users only need to know the value of the company or its ability to repay loans. Reliable information is verifiable and objective. The compilation of consistency information is to compare the financial statements of the same company in different periods and in the same accounting period in a meaningful way.
prudence norms
When estimates are needed, accountants must use their judgment to record transactions. The number of years of continuous production of equipment and some accounts receivable that cannot be cashed are examples that need to be evaluated. In financial data reporting, accountants follow the principle of prudence, which requires choosing the more unfavorable one among two equally possible estimates. For example, suppose the warranty department of a manufacturing company has recorded a 3% return rate of product X in the past two years, but the engineering department of the company insists that this return rate is only a statistical anomaly, and only less than 1% of product X will need service in the next year. Unless the engineering department provides convincing evidence to support its evaluation, the company's accountants must follow the principle of prudence and plan a return rate of 3%. Losses and expenses, such as warranty-when possible and reasonable estimates are recorded. Revenue will be recorded when it is realized.
Principle of importance
Accountants abide by the principle of materiality, and any accounting principle can be ignored as long as it does not affect the financial information of users. Of course, it is not important for the accounting department of any company to track paper clips or pages and cause excessive burden. Although there is no clear measure of importance, accountants must make reasonable judgments on these matters. For a big company like General Motors, thousands of dollars is not necessarily important, but the same amount is quite important for a small family business.