Accounting Standards and Principles: Ignore Them At Your Own Risk

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Accounting principles and standards are absolutely necessary for any business as they help to clearly explain financial information. But these principles and standards can also be very complicated and convoluted. Keeping up with the latest publications and making sure your business follows accounting standards and principles can be a long and difficult task.

The accounting process would not be possible without accounting principles serving as the “glue” that holds everything together. 

For example, one of the main goals of financial statements is to give the person reading them a useful tool that can be used when making important decisions for the company.

Characteristics of useful accounting information

The information gleaned from the accounting books needs to possess a number of qualities before it can be of any use. These include dependability and applicability. If the accounting information is to be trusted, it needs to be unbiased, correct, and easy to check.

For accounting information to be useful, it must first be predictable, then it must be prepared in a timely manner, and finally it must be able to provide relevant feedback. 

The accounting information must also be consistent, comparable, serve a utilitarian need (such as cost/benefit analysis), and have a meaningful impact. These are additional features that must be present.

Operational rules to remember

In addition to these characteristics, there are certain established operational rules. This includes:

  • how to report revenue and expenses;
  • how expenses are matched to revenue;
  • what to do when a choice can be made that might overstate or understate figures; and 
  • what information should be disclosed in order for the reader to fully understand the circumstances under which the information is being presented. 

The reader can also count on certain fundamental assumptions, such as the following: 

  • the information pertains only to the business entity and does not contain any other unrelated information; 
  • the business is a going concern and will not cease operations in the near future; 
  • the financial information presented is measured in specific time intervals such as a month, quarter, or year; 
  • the financial information is using a certain unit of measure such as dollars, and not board feet, etc.; 
  • the information is presented in a standardized format; and
  • the accounting method used is double-entry and not another approach.

Accounting principles versus standards

The term “accounting principles” should not be confused with “accounting standards.” 

An accounting standard is an agreement regarding the manner in which a particular accounting issue will be handled. 

For instance, a standard might specify the kind of inventory management system that is suitable for a particular kind of enterprise; how capital leases ought to be recorded; the number of years over which intangible assets ought to be amortized; the kinds of depreciation strategies that ought to be applied; and so on. 

Over the course of time, literally dozens of different accounting standards have been developed and implemented. These standards are consistently being updated or eliminated because of their increasing obsolescence.

Key takeaway

If you wish to participate in the accounting game of cards, you must familiarize yourself with the game’s rules, which are accounting principles and standards. You do so at your own expense if you choose not to play by the rules, as recent U.S. corporate accounting scandals have demonstrated.

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