Yes, there is group whose role is to maintain all those accounting rules and it’s the Financial Accounting Standards Board and it sets out the standard framework of guidelines for financial accounting used in a specific jurisdiction, such as the United States of America. They are more commonly referred to as accounting standards. Basically, they are the requirements, conventions, and rules that accountants follow in recording and are thus summarized in financial statements. Not all the rules are the same for specific industries and a user of financial statements doesn’t necessarily need to know them all. The American Institute of Certified Public Accountants published audit alerts which deal with specific aspects of various industries might you be interested.
There are the common principles of accounting:
- Revenue principle, also known as the realization principle, states that revenue is earned when the sale is made, which is typically when goods or services are provided reflected when legal ownership passes from seller to buyer.
- The expense principle is the flip side of the revenue principle, if you receive or use some services or goods, you’ve incurred the expense of those.
- There is a matching principle to relate these two, it is necessary to match the related expenses with the revenue.
- Amounts are generally quantified, or recorded at historical cost. Items like the building owned by the business are reflected at what it cost way back when as opposed to what it can be sold for now, thus the historical cost principle.
- While estimates are sometimes required, but let’s face it, we want financial statements to be factual, thus objectively reported. This principle says to rely on subjectivity as little as possible.
- It is expected that a business will continue to operate, otherwise there should be a variation of the auditors’ report, thus the continuity assumption.
- Quite simply what is reported for a U.S. businesses needs to use U.S. dollars in their accounting. The unit-of-measure assumption assumes that a business’s domestic currency as its unit of measure.
- To be clear, a business must be an entity separate for its shareholders, partners or it has a sole owner, that individual.