Matching Principle – states that all expenses must be matched and recorded with their respective revenues in the period that they were incurred instead of when they are paid. This accrual basis of accounting gives a more accurate picture of financial events during the period. Revenue Recognition Principle – requires companies to record revenue when it is earned instead of when it is collected. Assets are then remain on the balance sheet at their historical without being adjusted for fluctuations in market value. Historical Cost Principle – requires companies to record the purchase of goods, services, or capital assets at the price they paid for them. I wrote a short description for each as well as an explanation on how they relate to financial accounting. Here’s a list of more than 5 basic accounting principles that make up GAAP in the United States. You will be able to reference these principles and reason your way through revenue, expense, and any other combination of problems later on in the study course. After you know the basic accounting principles, most accounting topics will make more sense. These principles show up all over the place in the study of accounting. This isn’t just memorizing some accounting information for a test and then forgetting it two days later. It’s important to have a basic understanding of these main accounting principles as you learn accounting. Some accounting principles come from long-used accounting practices where as others come from ruling making bodies like the FASB.
All of the concepts and standards in GAAP can be traced back to the underlying accounting principles. Definition: Accounting principles are the building blocks for GAAP.
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