The fundamental purpose of any business is to get proper and acceptable returns on the amount of funds and effort that is put into conducting the business. Most businesses will have investors, employees and other entities like taxation authorities who would be keen to know how a business is functioning. The affairs of a business are best studied by consulting its book of accounts that will have its balance sheet.
Balance sheets and final accounts are the end products of keeping the books of a business. As these accounts have become very important to judge the health of any enterprise, accountants have developed principles, conventions, and concepts which are fundamental to the accounting process.
These are fundamentals that have been widely accepted and this allows the accounts prepared to be both credible and reliable. General accounting principles that are widely accepted have to be logical and consistent while transactions are recorded and conform to the practices and procedures that have been established.
Any principle has to be any rule or law that can be a guide to an action and establishes a settled method of practicing. Accounting has four basic principles that each come with their own constraints and assumptions, and together all of these make for the principles of accounting that are widely accepted.
It is not necessary that the accountant of a business follow these rules, but following them as closely as possible leads to the accounts being written to be widely acceptable to all the people who are concerned with the welfare of that particular business.
The cost principle is the first of these principles and requires recording the actual cost of acquiring any asset rather than its free market value. This gives a reliable method of recording that is not influenced in any way by market values. As per the accrual principle, businesses are required to record revenue at the time that it is earned and not when any cash is actually received. The purpose behind this principle is that it shows work that is completed and is not connected with any future action.
The third principle is the matching principle and this allows for an analysis of expenses and revenues on a real time basis. Companies are required to report expenses and income statements at the same time as revenues related to that expense.
The fourth principle is the disclosure principle and this requires that all the accounts of a business must be disclosed so that judgments can be made about the financial viability of that business. Care has to be taken to see that such disclosures do not lead to opinions that are wrong or lead to the accruing of unreasonable expenses.
Accounting principles assume that any business is a long term one and remains an independent entity that is different from its owner or owners. The accounts need to be reported periodically at regular intervals. Often these periods are mandated by tax authorities, though it is up to the business to decide its own preparation or reporting to allow for the proper control of the business.