Financial accounting refers to the classification, measurement, recording and communication of financial transactions of a business entity in monetary terms and in accordance with the generally accepted accounting principles to the internal and external users of accounting information. There are a number of principles that govern financial accounting and these include the following.

1.Principle of business entity; this principle emphasizes that matters of financial transactions of the business should be recorded separately from those of the owner. This stresses the legal principle of corporate liability for businesses operating as companies that a company is a separate legal entity from its owners. Therefore, a business under the accounting principle of business entity is separate from its owners and transactions of the firm should be recorded differently from those of the owner.

2.The principle of going concern; here the transactions of a business are recorded in the way the business is seen to continue in a foreseen future.

3. Another principle of accounting is the realization principle. This provides that all transactions and any profits from those transactions should be recognized and recorded at the point of sale. This means that a sale is recorded as a sale at a point when it is made.

4. Duality principle; this principle of accounting is to the effect that every transaction has a double effect on the position of the business. It is either a reduction or an addition to the income of the business.

6. Accrual principle; this states that items should be recognized and  recorded at the occurrence of the transaction and not when cash is received e.g. A buys a loaf of bread from B but does not pay for it. B will record this as a sale at this point even though cash was not received according to the accrual principle.

7.  Principle of Money Measurement; in accounting, this principle states that all items to be recorded should be quantified in monetary terms e.g. if the recording to be entered is in regards to a gift in form of a car, the value of that gift should be ascertained while recording accounting information.

8. The principle of consistency; this means that the business entity should treat transactions and valuation methods the same way from one year to another. E.g. if an entity’s year ends in July, the same should be carried forward to every year of accounting and not having inconsistencies when a year of accounting ends.

9. The periodicity Principle; this states that transactions should be recorded, prepared and reported in every financial period. No transaction should be left out in a given financial period while carrying out financial accounting.

10. Materiality principle; this emphasizes that while carrying out financial accounting; the recorder should recognize only the material items to the transaction and should exclude all the immaterial ones.

11. Lastly is the Principle of prudence which states that profits should not be recognized until a sale has been completed.

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This article was compiled by Nandera Babra.