![]() They also ensure consistency from entity to entity which is essential when comparing numerous financials within a given industry. Standardized accounting principles ensure consistency for multiple fiscal periods to more accurately analyze comparative financial data. These principles are needed in order to standardize and regulate various accounting methods and assumptions. Why are Accounting Principles Important and Needed?Īccounting Principles are important to ensure that financial information is acceptable, accurate, and understandable to both internal and external users. Because Indiana University receives funding from the local, state and federal level, IU follows both US GAAP and the generally accepted accounting principles issued by GASB. Indiana University must follow guidelines from two separate governing organizations – US Generally Accepted Accounting Principles (GAAP) and Governmental Accounting Standards Board (GASB). There are many frameworks of accounting principles used for various types of business entities around the world. Introduction to Accounting Principles What are Accounting Principles?Īccounting principles are general rules and guidelines that entities must follow in order to accurately report their financial statements. Additionally, examples will be provided to help illustrate how the principles are used within the university. Information presented below will walk through the five main accounting principles which acts as the pillar for financial recording and reporting at IU. This standard discusses fundamental concepts as it relates to recordkeeping for accounting and how transactions are recorded internally within Indiana University. Accounting Fundamentals – Normal Balances Section.Accounting Fundamentals – Accounting Terminology Section.At the end of the period, Big Appliance should match the $5,000 cost with the $8,000 revenue.Prior to reading the standard Accounting Principles, it is beneficial to review the below sections to gain foundational information: It purchases a large appliance from wholesalers for $5,000 and resells it to a local restaurant for $8,000. ![]() – Big Appliance has sold kitchen appliances for 30 years in a small town. Since the payroll costs can be directly linked back to revenue generated in the period, the payroll costs are expensed in the current period. Bajor pays its employees $20 an hour and sells every frame produced by its employees. – Bajor Art Studio produces picture frames and sells them to wholesalers like Michaels and Hobby Lobby. Thus, the machine is depreciated over its 10-year useful life instead of being fully expensed in 2015. According to the matching principle, the machine cost should be matched with the revenues it creates. This means that the machine will produce products for at least 10 years into the future. This machine has a useful life of 10 years. buys a new piece of equipment for $100,000 in 2015. In short, the matching principle states that where expenses can be matched with revenues, we should do so because the benefits of an asset or revenue should be linked to the costs of that asset or revenue. This is the key concept behind depreciation where an asset’s cost is recognized over many periods. The matching principle also states that expenses should be recognized in a “rational and systematic” manner. These expenses are recorded in the current period. Administrative salaries, for example, cannot be matched to any specific revenue stream. Period costs do not have corresponding revenues. ![]() ![]() Product costs can be tied directly to products and in turn revenues. In general, there are two types of costs: product and period costs. In this sense, the matching principle recognizes expenses as the revenue recognition principle recognizes income. This matches the revenues and expenses in a period. Expenses should be recorded as the corresponding revenues are recorded. In other words, expenses shouldn’t be recorded when they are paid. The matching principle states that expenses should be recognized and recorded when those expenses can be matched with the revenues those expenses helped to generate. ![]()
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