Standard Rules and Principles in Financial Accounting

Standard Rules and Principles in Financial Accounting

Standard Rules and Principles in Financial Accounting

by Patti Eunyce Dino -
Number of replies: 14

Cite two examples of standard rules/principles in financial accounting. Why is  it important to follow these standard rules and principles in bookkeeping and in the preparation of financial statements? 

In financial accounting, two (2) standard rules/principles of GAAP includes the OBJECTIVITY principle and MATCHING principle.

Firstly, the objectivity principle states that only factual and verifiable data in the books  should be recorded and never include any subjective measurement of values. Even though there may be times when subjective data may seem to be more appealing than verifiable data, the verifiable data should always be recorded, analysed, and used. Since the accounting world already operates under a set of assumptions, it is important to employ and utilise this principle to maintain accuracy and consistency within bookkeeping and financial statements that are  produced by the internal persons and reviewed/read by external persons. The produced financial statements of the business will then be solely based on solid evidence, and there will be greater assurance that the management and accounting department of an industry are not simply producing biased and self-opinionated financial statements. 

Secondly, the matching principle states that an item of revenue must be matched with an item of expense, similarly to the dual nature of debits and credits. For example, if a business is selling beverages, the expense of the ingredients, cups, and straws must also be recorded once a customer purchases a drink. When businesses apply the revenue, expense, and matching principles, then it can be said that they operate under the accrual accounting method. Recognising the expenses at the wrong time may result in distortion of financial statements. This follows a domino effect in the financial statements as each account is reflected and represented. Even worst with a simple mistake, this may provide an inaccurate reflection of the financial position of the business. The matching principle not only obeys the ‘Assets = Liabilities + Owner’s Equity’ rule, but also gives cohesion within data and balances the numbers involved from journaling (bookkeeping), posting to a ledger, making a trial balance, and eventually preparing the necessary financial statements of the business.

350 words

In reply to Patti Eunyce Dino

Re: Standard Rules and Principles in Financial Accounting

by Ralph Aaron Gobaco -

There are two principles that are important in the accrual basis of accounting.

The first is the Realization of Revenue principle. It recognizes revenue when it is earned regardless of actual collection of cash. For example, if a service rendered and a note for 30 days was given, it is considered as income on the month the note was received.

The second is the Recognition of Expense principle. It recognizes expenses when it is incurred regardless of payment of cash. For example, if utilities were used up in March but pain in April, the expense should be recognized in March.

Both of these principles are important in the practice of accrual assumption of accounting and help to establish a more accurate depiction of the financial activity of a business than the cash concept of accounting.

135 words

In reply to Patti Eunyce Dino

Re: Standard Rules and Principles in Financial Accounting

by Danica Dixie Depante -
Two examples of standard rules or principles used in financial accounting are the (1) revenue recognition principle and the (2) full disclosure principle.

The revenue recognition principle indicates that income or revenue is recorded during the time when the goods or services have been delivered or rendered, instead of the time when the payment is received. By doing so, tracking of cash flow is made easier as the recording is not based on when the cash is received; no backlogs in terms of the entries listed. Companies also benefit from this as it can assess real-time cash flow (whether profit or loss) with no missing entries as the transaction is listed regardless of the date the payment is made.

The full disclosure principle inclines company to be honest with their financial information, making sure that whatever is written there is accurate and not ambiguous. Any relevant information (regardless of it affecting the company positively or negatively) is made known to important individuals of the company. Practicing such principle will train managers and the staff to remain transparent in handling their financial information, which should always be expected of companies.

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In reply to Patti Eunyce Dino

Re: Standard Rules and Principles in Financial Accounting

by Adrian Chester Uy -
Two examples of standard rules/principles in financial accounting are Time Period Assumption and Cost Principles.


This Time Period Assumption principle of accounting assumes that it is possible to report that activities of a company in relatively short and distinct time intervals such the one year ended December 31,2020. The shorter time interval, requires the accountant to estimate amounts relevant to that period. It is important that the period of time is shown in the heading in an income statement for example. Labelling financial statements must inform the users what the statement covers either one week, month, or year. (ex. One week ended December 31, 2020) This is important in order for the user to know what period of time the financial statement covers.


The cost principle make the term “cost” refer to the cash equivalent of an object when it was obtained. This explains why the amount shown in a financial statement reflects the history cost of objects. Due to this principle assets are not adjusted for inflation. This means that an asset amount does not really reflect the amount of money the business would receive if the object was selled. This means that this principle is important because it tells the users to not only look at the financial aspects of the company but also to look at the non-financial aspects of the company.

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In reply to Adrian Chester Uy

Re: Standard Rules and Principles in Financial Accounting

by Arvin DY -
Two of the important principles in financial accounting include:

1) Matching Principle
This states that the expenses incurred in a period should be recorded in the same period in which related revenues was earned. This is to recognize expenses related to the revenue earned by the business such as commission to sales representative, or costs of providing service to customers. This is important in avoiding distorting of financial statements which may result to incorrect record of net income or net loss.

2) Cost Principle
This principle states that assets, liabilities, and equity investments should be recorded at historical cost, meaning their cost at the time they were purchase or used. This principle allows easy confirmation of the values due to the invoices, receipts and bank transactions at the time, it also makes it easier to record assets rather than continually updating them to their current market value.

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In reply to Patti Eunyce Dino

Re: Standard Rules and Principles in Financial Accounting

by Samuel Aquino -
Two examples of standard rules or principles important in financial accounting are: full disclosure principle and consistency principle.

The full disclosure principle states that all relevant facts concerning the financial position of the business must be presented in the financial statements. Every significant event and transaction must be disclosed in the statements completely and accurately.

The consistency principle is related to the objectivity principle. It states that a particular accounting technique or method must not be changed from period to period. This principle allows for comparison between financial statements over time.

These principles allow for transparency and clarity in creating and presenting financial statements.

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In reply to Patti Eunyce Dino

Re: Standard Rules and Principles in Financial Accounting

by Gabrielle Babao -
Two examples of standard rules/principles in financial accounting are the following:

1. Principle of Permanence of Methods
This states that there must be consistency when it comes to the procedures used in the preparation of all financial reports. This principle is important to adhere by so that there is coherence and allows for comparison of the financial information among different time periods of the company.

2. Principle of Prudence
This principle puts emphasis on fact-based financial data representation. A company should not overestimate any of it profits, assets or revenues; and conversely any liabilities or expenses should not be underestimated. By complying with this principle it can give a more realistic view of the standpoint of the company's liabilities and revenue. It can also help to minimize losses by truly understanding the company's financial risk.

136 words

In reply to Patti Eunyce Dino

Re: Standard Rules and Principles in Financial Accounting

by Maria Alexandra Sarmiento -
Cite two examples of standard rules/principles in financial accounting. Why is it important to follow these standard rules and principles in bookkeeping and in the preparation of financial statements?

The Consistency Principle and the Conservatism Principle are two of the many principles under the GAAP or the Generally Accepted Accounting Principles.

The Consistency Principle requires that a particular accounting technique need not be changed from period to period. This is extremely important to be to expedite the comparison of financial statement from one time period to the next. Being consistent with the method you use in financial accounting will help the managers and the people in the business (i.e. investors, other or new accountants, etc.) understand the trend of the performance of the business. By following this principle, a manager can make correctly guided financial decisions for the business. This is also to prevent confusion and miscalculation brought by using different methods which may lead to inaccurate financial choices and consequently, losses and additional costs to the business.

The Conservatism Principle is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to recognize revenues and assets when they are assured of being received. In other words, in a time of uncertainty, one should choose the option which generates the lower net income and the less favorable financial position. This is important to prevent the likelihood of overstating the assets and income of the company which may increase the taxes to be paid when in actuality, the financial position of the business is actually not that good.

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In reply to Patti Eunyce Dino

Re: Standard Rules and Principles in Financial Accounting

by Alexis Sia -
Two examples of standard rules/principles in financial accounting are (1) Economic Entity Assumption and (2) Monetary Unit Assumption

(1) Economic Entity Assumption - The business is considered a separate entity and exist independently of its owner. All business transactions are kept separate from the business owners' personal transactions. It is important to follow this rule/principle in order for an accurate analysis of the performance and financial standing of the business. If personal transactions were taken into account, there would be inaccuracies in the analysis. This is also so that the business owner can protect his/her own personal finances and it will make processes easier just in case the owner decides to incorporate in the future (in the case of a sole proprietorship) or minimize conflict between owners (in the case of more than one owner of the business).
(2) Monetary Unit Assumption - This assumes business transactions can be measured and expressed in terms of monetary units. All financial transactions must be recorded in the same currency and the monetary units must be stable and dependable. This is important so that financial information are consistent and to avoid any errors. Moreover, inflation is disregarded in the business' financial reports, even if that business has existed for decades, which helps us to avoid any inaccuracies in concluding performance and financial standing of the business.

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In reply to Patti Eunyce Dino

Re: Standard Rules and Principles in Financial Accounting

by Sheryl Chisom Madike -

Some principles of financial accounting that I consider essential to uphold are the 1.) Monetary Unit Principle, and the 2.) Full Disclosure Principle

According to the Monetary Unit principle, it is important that business opt  to record accounts and transactions that have a corresponding monetary value that pertains to it, which can then be expressed in terms of currency. This needs to be particularly adhered to in order to prevent making estimations of values of the assets and liabilities of the business. This goes hand in hand with the second principle of Full Disclosure.


Full Disclosure principle entails that the business maintain utmost transparency should they report all of their financial dealings to potential stakeholders for example.  This is to guarantee that those who will be making analyses of a certain business' financial matters would be relying on complete and honest information, with no detail spared. This principle supports the former such that not only are the financial information presented in a matter that is objective and logical and to a financial record through the inclusion of monetary units, it also somehow leans on the morality of business to not withhold any  piece of information that would be pertinent to reveal to potential viewers, thereby permitting such viewers to make analyses, judgements and evaluations with a sound foundation

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In reply to Patti Eunyce Dino

Re: Standard Rules and Principles in Financial Accounting

by Angelica Marie Tan -
Two of the examples of standard rules or principles in financial accounting are the Objectivity principle and the Consistent principle.

Objectivity principle is essential in accounting. It states that there must be no personal influences or biases in bookkeeping and in the preparation of financial statements; and that every recorded transaction should be supported by an evidence. Reliable, verifiable and accurate account information is always fundamental in evaluating the financial position of an entity.

Another important principle in accounting is the consistency principle. This requires the application of the same accounting methods and procedures used in a business from period to period. Throughout the accounting periods, transactions or events should be recorded in a similar manner to allow easier comparison of financial performances throughout the different fiscal years. This principle can also facilitate familiarization among employees and can enable cost and time efficiency. If the company wishes to change its accounting method for the next fiscal year for a valid reason, it may do so. However, this change needs to be taken into account and the effects of this change should be disclosed.

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In reply to Patti Eunyce Dino

Re: Standard Rules and Principles in Financial Accounting

by Franco Angelo Bayle -
One principle is the Economic Entity Assumption. This principle states that an owner of a business, and the business that they own, are two separate accounting entities, and their records must be kept distinct and separated. This allows for a clear picture of a business' financial standing to be seen when their accounting records are checked, and ensure that the business' current standing is caused solely by the circumstances of its operation.

Another principle is Conservatism. This is a guideline where, if there is a situation where there is a choice to report an item in different acceptable ways, an accountant should report in a way that results in less income/assets, just to be safe. Potential losses may be reported, but potential gains should not be. Rounding value of inventory when applicable can also be down from original cost, and never above.

143 words

In reply to Patti Eunyce Dino

Re: Standard Rules and Principles in Financial Accounting

by Maria Patricia Ugalde -
Time Period Principle
The Time Period Principle is one of the Generally Accepted Accounting Principles (GAAP) and it states that the business has to be able to create and compile financial statements at specific time periods throughout its lifespan. Whether it be at the start of the month, end of the month, or every quarter and so on (depending on the business), the time period will help establish markers in a business to help see development and its performance as well as being able to observe transactions in the business cycle.

Going Concern Principle
The Going Concern Principle is another of the Generally Accepted Accounting Principles (GAAP). It is an assumption made by accountants and other shareholders in an entity in which they make the assumption that the business will live on indefinitely, meaning there they assume that there is no end to the business. This assumption is made to help justify the acts of recording the businesses’ transactions and operations throughout its life span. Using these recordings, the business would be able to predict the future and set the goals that they want to attain. Without this assumption, there would be no reason to perform accounting which is why this principle is very important.

205 words

In reply to Patti Eunyce Dino

Re: Standard Rules and Principles in Financial Accounting

by Yves Lance Daniel Reyes -
Principle of consistency
Apply the same standards throughout the reporting process. This is important because it ensures that financial statements of different periods can be compared to each other.

Principle of Prudence
Emphasize fact-based financial data representation that is not clouded by speculation. This principle is important because if bookkeeping was based on speculation, the analysis of the company's financial standing will be inaccurate. This might affect the performance of the manager or the trust of investors on the company.

80 words

In reply to Patti Eunyce Dino

Re: Standard Rules and Principles in Financial Accounting

by Martin Andre Alvero -
1. Economic Entity Assumption
This states that there is a separation between the personal finances of the business owner and the business itself. This ensures that whatever business decisions are there to be made, the personal account of the owner won't have an influence on it.

2. Full Disclosure Principle
This states that all necessary information must be disclosed in the financial statement or the notes section. This is to make sure that the potential investors or stakeholders won't be misled by the information stated in the financial statements.

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