Accounting principles are the rules and guidelines that companies must follow when reporting financial data or information. To understand this, we can talk about the most popular sets of accounting principles, i.e. generally accepted accounting principles (GAAP).

Accounting principles differ from country to country. Since accounting principles differ across the world, investors should take caution when comparing companies from different countries. The issue of differing accounting principles is less of a concern in more mature markets. They are so basic that if any of them is altered, the entire nature of financial accounting would change.

A number of basic accounting principles have been developed through common usage. They form the basis upon which modern accounting is based. The best-known of these principles are as follows:

CONSERVATISM PRINCIPLE
This is the concept that you should record expenses and liabilities as soon as possible, but to record revenues and assets only when you are sure that they will occur. This introduces a conservative slant to the financial statements that may yield lower reported profits, since revenue and asset recognition may be delayed for some time. Conversely, this principle tends to encourage that accountants should record losses earlier, rather than later. This concept can be taken too far, where a business persistently misstates its results to be worse than is realistically the case.

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