Financial Accounting Principles

As practiced in many countries, all financial statements are formulated for a specific accounting period. A typical accounting period is three months. Specifically, the U.S.

Securities and Exchange Commission prescribes that all publicly traded companies file Form 10-Q reports every quarter. All companies also need to publish their Form 10-K reports annually. The financial statements must adhere to the basic principles of accounting, discussed in the following subsections (Weygandt 2013; Needles and Powers 2013).

Accrual Principle

Accounting statements include both cash and credit transactions. Revenue is recognized when it is earned. For example, a manufacturing enterprise will recognize revenues as soon as products are shipped to the customer and an invoice is sent, irrespective of any credit payment already received or yet to be collected. Sports teams are known to sell season tickets ahead of the games for cash and then recognize the applicable revenue only after each game is played. According to the accrual principle of accounting, companies recognize revenues when earned, with the assumption that the collection of this revenue from approved credit accounts and the delivery of the promised products or services are both reasonably ensured.

Similarly, the accrual principle specifies that costs and expenses are established when incurred, even before actual payments are made.

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