accounting principles

accounting principles

Importance of Accounting Principles

1. Introduction to Accounting Principles

A convergence of the differing sources of accounting guidance is important to establish the success of principles of accounting in a global business community. Accounting can be seen as the spoken language of the economic community. Just as natural languages circumscribe the available realm of thought in a particular culture, so a set of accounting principles can restrict available financial phenomena that can be reported. The principles of accounting are based on a number of underlying concepts. These have been developed in-depth and are interrelated given the scope and volume constraints imposed by the Accounting Standard Committee framework. There are three primary assumptions that underpin accounting principles. The opposite aspects of these assumptions are respectively and generally held or achieved.

The principle of accounting refers to a set of rules and standards under which financial statements should be prepared. The basic underlying principle of accounting is that financial statements should provide information about the underlying economic activities of the organization. Accounting principles describe the role of accounting within the management function, political context of accounting standard setting in Australia, and provide a theoretical framework for analyzing accounting information. The different sets of accounting standards available for the preparation of financial statements are a historical set, a general set, and an industry-specific set. These accounting standards are used in preparing the annual report of an Australian company under the Corporations Law (2001). A common set of accounting standards will mean that the financial statements prepared by one company can more readily be compared with the financial statements of other companies.

2. Benefits of Following Accounting Principles

People interested in your financial results, whether they be creditors, investors, or government agencies, rely on the honesty of your financial statement to portray an accurate depiction of the company’s health. Whether by ignorance, honest error, or dishonest intent, every misstated item leads to a misrepresentation of the financial health of a company, which can affect the provision of credit from creditors, the price of stock, and the ability of investors to assess the company’s risk and rate of return. Following rules when preparing financial statements ensures that the financial statements are comparable between different periods for the same company and among companies, whether they are in the same industry or not. This facilitates the evaluation of an entity’s financial performance, its economic health, and the foreseeable future of its operations. Additionally, following rules means that an entity has prepared financial statements that can be audited by an independent accounting professional to help instill trust in the integrity of the financial statements.

Choosing to follow accounting principles and standards is a lot like making monkey bread, a sticky, cake-like pastry that’s hard not to tear into. If the dough isn’t prepared correctly, with the right ingredients in the right order, then the results won’t be as sweet or functional. Failure to follow accounting standards can result in fines for your business, both from the government and the general public’s opinions. Financial misstatements, whether deliberate or unintentional, distort a company’s true economic health. Investors, employees, and creditors can ask for their money back when financial reporting inaccurately reflects the company’s performance and condition. Remember Enron? Investors and financial analysts use user financial statements to evaluate the creditworthiness and investment value of companies. The capital markets, both equity and debt, rely on these statements to provide information on the performance, prospects, and risk of companies that are members of the capital markets.

3. Key Accounting Principles to Consider

Prudence refers to an accountant’s need to be neutral and cautious while ensuring a company doesn’t report financial statements in too rosy a manner. A company that buys a huge block of new equipment may easily be able to overestimate revenue from that asset when estimating value in financial reports. Meanwhile, a business may also easily be able to overlook failures of operations and inventory because they lower taxable income. The doctrine of prudence serves to prevent these problems. In addition, prudence discourages accountants from immediately assuming that good fortune necessarily awaits a company that changes its strategic course. Whichever accounting methods a business employs are of no consequence if it doesn’t acquire the right assets. Mindfulness of bad interruptions is important for companies striving for the establishment of provisions. These principles are subsequently derived from the application of prudence. Although the application of prudence makes enterprises hesitant to record market gains from increments in the value of traders’ inventories, it is useful when they are reestimated.

Accounting principles are currently known as Generally Accepted Accounting Principles, or GAAP. In Canada, the profession defines them as Accounting Standards for Private Enterprises, or ASPE. They are not inflexible but aim to provide a common template to assess and compare financial statements. The principles are constantly changing. The vast majority of business accountants use some form of GAAP or another. Someone using data from different entities can still make informed judgments about organizations. Conformity to Generally Accepted Accounting Principles is necessary for Canadian businesses when reporting financial results to state agencies and to their investors.

4. Challenges in Implementing Accounting Principles

Challenges now lie in the accounting aspects for companies due to external conditions. If not, then there will be a problem not only for the company itself or the user of the financial statements or accounting service officers. The accounting principle must be able to accurately reflect and reflect the true picture of the company and give a statement that is not only reasonable but also the best and with the true information obtained and with as little bias as possible, considering that this can affect the economy and the future of the community. Relevant information must be given for entities that give economic strength to the community’s decision-making activities, while financial statements also reflect the true condition of the company with its potential to generate future benefits.

The implementation of accounting principles for businesses will challenge almost any school of accounting in understanding the business world. Because with high magnitude and uncertainty, it will continue to test the ability of accounting science to meet the challenges. The nature of business activities will also continue to change in response to demands for more transparency and better management disclosure. The essence of business activities also increases in the globalization of the fields. Every problem that exists in the accounting aspect will certainly influence business decisions and also lead to multi-layered problems.

5. Conclusion: Embracing Accounting Principles for Success

The role of accounting principles in business cannot be overstated. The wrong decision can be made on wrong information. This is what has made some companies continue to suffer. When effective accounting principles are embraced, decision making and financial control can be enhanced. Compliance with accounting standards is usually presumed to have the potential to reduce fraudulent practices within the Nigerian banking sector. Hence, policymakers, standard setters, and professionals in the field of accountancy should continue to put more effort into harmonizing international accounting standards and principles to bridge the gap between financial information and decision making. Emphasis should also be placed on designing a more comprehensive theoretical framework that will assist academics and practitioners in harmonizing the standards with local accounting techniques in order to reduce current financial statements. This review is limited in literature towards accounting principles and standards. However, little attention is given to evaluating the accumulation of fraud within the Nigerian banking sector, its impact on investment decision making, and the attempts made to reduce or eliminate fraudulent practices in the sector. Future researchers are therefore encouraged to investigate the affairs of the banking industry and other sectors in a comprehensive approach for a better understanding of how compliance with accounting standards will impact investment decision making. With the above discussion, it is clear that investors make investment decisions based on company-published financial statements, which are the end-product of the accounting system. Therefore, compliance with accounting standards is assumed to have a positive impact on their investment decision making. This notion is anchored on the fact that accounting standards make financial information of quality, and therefore investors can confidently use this information in making investment decisions. It is against this background that the going concern matter is modeled in assumption 2 to determine its impact on investors’ investment decision making in Nigeria.