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The four accounting principles are:

  • Expense recognition: this principle establishes that expenses are recognized when their associated revenue is realized. For example, if I buy inventory in May, and sell it in June, I will recognize the inventory expense in June, not in May.
  • Measurement: this principle establishes that businesses should only record transactions when these transactions can be expressed in terms of money.
  • Revenue recognition: this principle establishes that revenues are accounted for when they are realized, not necessarily when they are paid for. For example, if I sell merchandise in June on credit, and the credit is due in July, I will recognize the revenue in June, not in July.
  • Full disclosure: this principle establishes that public companies (those that sell and buy their stock in the public market) should disclose all relevant financial information to the stockholders (the authorities, investors, credit rating agencies, auditing agencies).

Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting.

  • The four general accounting principles are:

1) Expense Recognition:

  • This principle shows that costs are recognized when the relevant revenue is realized.  
  • For example, if you buy inventory in May and sell it in June, record the inventory cost in June instead of May.

2) Measurement:

  • This principle states that a company only needs to record a transaction if it can be expressed in money.

3) Revenue Recognition:

  • This policy states that revenue is recognized when it is recognized and not necessarily when it is paid.
  • For example, if you sell an item with credits in June and the credit expires in July, record the sale in June instead of July.

4) Full Disclosure:

  • This principle requires public companies (those who buy and sell shares in the open market) to disclose all relevant financial information to shareholders (authorities, investors,  rating agencies, accounting firms).

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