The Basic Accounting Principles You Need to Know Accounting Concepts

what are the basic principles of accounting

Numerous types of accountants specialize in different types of businesses. Popular types of accountants include certified public accountants, staff accountants, forensic accountants, government accountants, project accountants, and auditors. Overhead is a term that describes any expenses required to continue business operations that don’t directly affect a company’s products or services. Conversely, debits are accounting entries that increase an asset or expense account and decrease a liability or equity account. These entries are recorded on the left side of the account and reflect incoming money.

It can be hard to keep up with new opportunities and technologies in our rapidly changing and evolving world, especially in a professional field such as accounting. She has been working in the writing sphere for the last five years, covering everything from breaking news to lifestyle features, and now digital payments. Caroline previously served as the Marketing Coordinator at PaymentCloud, a merchant services provider that offers hard-to-place solutions for business owners across the nation. For example, a company might be involved in a lawsuit with another company that is demanding lots of money.

Non-GAAP Reporting

In other words, you’re always reporting the historical cost of the asset or item. Privately held companies and nonprofit organizations also may be required by lenders or investors to file GAAP-compliant financial statements. For example, annual audited GAAP financial statements are a common loan covenant required by most banking institutions. Therefore, most companies and organizations in the U.S. comply with GAAP, even though it is not a legal requirement. The International Financial Reporting Standards (IFRS) is the most widely used set of accounting principles, with adoption in 167 jurisdictions. The United States uses a separate set of accounting principles, known as generally accepted accounting principles (GAAP).

  • For example, if a customer has purchased $2,000 of products on credit, $2,000 would be recorded in the accounts receivable account.
  • Your liabilities could include a credit card balance, payroll, taxes, or a loan.
  • Accounting is more than just a complex mathematical discipline used for business.
  • Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting.

For a full rundown of GAAP and what each concept means, see NerdWallet’s generally accepted accounting principles (GAAP) explainer. Accounting principles are rules and guidelines that companies must abide by when reporting financial data. The principle entails that bank and accounting records shouldn’t be mixed with the assets and liabilities of different entities in a business. When recording each business transaction, it should be assigned to its respective entity (government agency, corporation, etc.).


At the same time, you want to make sure that financial information that’s important to stakeholders is easy to access and review. It makes it easier for stakeholders to understand and compare performance because it separates it into short periods of time. It also makes it easier for them to see what the most New Business Accounting Checklist for Startups current financial information is. Business moves fast, and many companies rely on in-progress projects and income to meet goals. But even if this applies to your business, continue to maintain accurate and timely records. All financial information, both negative and positive, is disclosed accurately.

GAAP results in straightforward and understandable financial reports that investors and regulators can easily use to assess a business’s financial standing. The full disclosure principle is a principle you may have heard in the news in regard to businesses releasing information. Generally, these notes first list the business’s accounting policies and follow with any additional relevant information. The specific time period assumption requires that a business’s financial reports show results over a distinct period of time in order for them to be meaningful to those reviewing them. Additionally, this accounting principle specifies that all financial statements must indicate the specific time period that they’re covering on the actual document.

Double-Entry Bookkeeping

But it also prevents you from accidentally taking big expenses into account for no reason, such as when you won’t realistically pay those costs until much later. The cost principle is one of the most basic and important accounting principles you can know. “Cost”, of course, refers to how much money you spent when you originally obtained that item or asset. Retained earnings, aka earnings surplus, are the profits left over after a business has paid off all costs in an accounting period. If a business has positive retained earnings, then the business’s equity will increase.

what are the basic principles of accounting

Businesses should record any financial transactions that could materially affect business decisions. Even if this results in minor transactions being recorded, the idea is that it’s better to give a comprehensive look at the business — this is especially important in the event of an audit. Accounting principles differ around the world, meaning that it’s not always easy to compare the financial statements of companies from different countries.