GENERALLY ACEEPTABLE ACCOUNTING PRINCIPLES

TIME PERIOD PRINCIPLE:

Definition: The time period principle is a financial accounting principle that assumes all companies
and organizations can divide activities into time periods. These time periods are often called accounting
and reporting time periods and can be weekly, monthly, semi-annually, annually, or any other time
interval.

Example

Take publicly traded companies for example. They typically produce quarterly financial statements.
Some companies even produce monthly or weekly statements. The time period principle allows these
companies to divide up their operations and activities into time periods instead of productions
processes or jobs.

THE REALIZATION PRINCIPLE:

The realization principle is the concept that revenue can only be recognized once the underlying
goods or services associated with the revenue have been delivered or rendered, respectively. Thus,
revenue can only be recognized after it has been earned. The best way to understand the
realization principle is through the following examples:

Advance payment for goods. A customer pays $1,000 in advance for a customer-designed product.
The seller does not realize the $1,000 of revenue until its work on the product is complete.
Consequently, the $1,000 is initially recorded as a liability (in the unearned revenue account),
which is then shifted to revenue only after the product has shipped.

Advance payment for services. A customer pays $6,000 in advance for a full year of software
support. The software provider does not realize the $6,000 of revenue until it has performed work
on the product. This can be defined as the passage of time, so the software provider could initially
record the entire $6,000 as a liability (in the unearned revenue account) and then shift $500 of it
per month to revenue.

MATERIALITY PRINCIPLE:
An accounting principle that states that financial reports only need to include information that will
be significant (material) to their users.
For example, an audit report would not need to specify the number of paper clips used by a bank.
For a large corporation, an expenditure of a few thousand dollars would not be material, but for a
smaller company it might be.

The concept of materiality is relative in size and importance. Some financial information might be
material to one company but might be immaterial to another. This is somewhat obvious when you think
about a small company verses a large company. A large and material expense to a small company might
be small an immaterial to a large company because of their size and revenue. The main question that
the materiality concept addresses is does the financial information make a difference to financial
statement users. If not, the company doesn’t have to worry about including it in their financial
statements because it is immaterial. 
CONSISTENCY PRINCIPLE:
The consistency principle requires accountants to be consistent from one accounting period to another
in applying accounting principles, methods, practices, and procedures. In other words, the readers of a
company's financial statements can presume that the same rules and measurements were followed in
all of the years being reported. If a change is made to a more preferred accounting method, the effects
of the change must be clearly disclosed.
The Financial Accounting Standards Board refers to consistency  as one of the characteristics or qualities
that makes accounting information useful.
Conservatism Principle:
The idea of conservatism suggests a business, should anticipate and record future losses rather
than future gains.
The conservatism principle explained
In situations where uncertainty exists and there is doubt between two reasonable alternatives
for recording an item, according to the conservatism principle your accountant should always
choose the “less favourable” outcome. This could mean minimising profits by recording
estimated expenses or losses, and not recording the estimated gains or revenues.
If there is uncertainty about a loss or potential loss - then you should record it.
If there is uncertainty about a gain or potential gain - then you should not record it.
Example of conservatism principle
Here is an example to show when the conservatism principle is used, and what situations it is
relevant for:
A cosmetic company Beauty Pacific, Inc. is in the process of a patent lawsuit against another
cosmetic company Pure Pacific, Inc.
Beauty Pacific, Inc anticipate to win the patent claims as well as a large settlement.
Beauty Pacific, Inc. cannot report the gains in their financial statements as long as this gain is
still uncertain. By recording the large settlement win, their financial statements could mislead
their users, so it should not be recorded until it is certain.
If Beauty Pacific, Inc. anticipate to lose the patent claims, and might also have to pay out a large
settlement, then they should record this loss in the notes of the financial statement. Whether
they end up winning or losing the lawsuit, Beauty Pacific, Inc. should take the most conservative
approach. Their financial statement users should be made aware of any potential large losses
that the company might experience in the future.
This is also known as “playing it safe”, or taking the least optimistic approach to a situation,
assuming that losses will be incurred and therefore adjusting the financial statements
accordingly. The purpose of this is to ensure that a business’s financial statements are reliable.
Another way of looking at the conservatism principle is that losses or expenses are recorded as
soon as they are incurred, whereas profits or gains are recorded only when they have been
received.
Objectivity Principle:
Definition: The objectivity principle states that financial and accounting information needs to
be independent and free from bias. This means that financial reporting like a
company’s financial statements need to be based on evidence and not opinions. Obviously, in
some areas professional accountants need to express their opinions, but the objectivity
principles says that opinions can’t be the sole bases for an accounting treatment.
Example
 Financial Statements must be reliable and verifiable. Reliability means that the financial
information is consistent and trustworthy to investors and end users. Verifiability means that
the financial information can be proven with evidence and the findings can be duplicated. Both
reliability and verifiability give usefulness to the financial statements.
In other words, GAAP is trying to make sure financial statements are based on facts and not
opinions or biases. Accountants who have close ties with companies may not be able to work
on their financial statements because the accountant might be bias. An accountant who owns
stock in a company may want to company to do well. There is obviously a conflict of interest
here. This is one of the things the objectivity principle aims to eliminate.