These are the three basic accounting principles:
- The Matching Principle – The first of the accounting principles is the matching principle. This principle makes sure that revenues and expenses are “matched” together. This is so that revenues can be matched with the corresponding cost. Without this, you could get wild variations in your profit and loss each month. For example, when you pay, you would record one expense every six months. However, the other five months will show no expense. That is why it revenues and expenses need to be matched together.
- The Historical Cost Principle – The principle states that all costs are to be recorded at the cost they were purchased at. Mostly, this is a simple process. But how do you record costs where you only have estimated costs and forecasts? This is where recognizing costs can become more difficult.
- The Revenue Recognition Principle – This principle requires that revenues can only be recognized when they have been realized. For example, if you have a building that you rent out each month you might receive rent a month in advance. This principle states you would only include the rent as income in the next month when you actually “earn” that income.