Getting Started with the Basic Accounting Principles


The basic accounting principles are a must-know. In some cases, if you don’t know and follow the principles, you might not be able to run a very successful business or get listed in the stock exchange.

The accounting standards are important to know and these standards enforce the basic accounting principles themselves to ease the use of accounting for business owners and the readers of their economic reporting.

There are a total of 13 basic accounting principles and we’ll give you a brief summary of each. Remember, this article is just for getting started. It’s not your full guide to accounting principles.

·        Consistency: Your method of financial reporting and the accounting shall be consistent unless you discover a better method and make it known that you’re changing. It’s really hard to trust companies without consistent accounting because it’ll be taking a risk to invest in them if their results and estimates can be easily manipulated by using different methods.

·        Reliability: Evidence shall support reporting inch-by-inch. Anything that cannot be proven should not be reported. Not only it builds up mistrust but it might also get you in trouble from the auditors.

·        Economic entity assumption: Legally the business owner and business are treated as one, but in accounting, you cannot intermingle personal transactions, other businesses, or any other property or asset, while accounting for the business. Not behaving as a separate economic entity can bring up questions and confusion.

·        Time period assumption: Financial reporting should be made in preferably short intervals of time. This makes data more comparable and helps in trend analysis. The time period must be shown on reports.

·        Monetary unit assumption: It’s important to do reporting in a fixed currency so that it’s easy to record the transactions no matter when they took place or what extra measures were appended to them as charge. This is also the reason that the USD’s purchasing power is seemingly the same throughout the past decades.

·        Accrual principle: The accrual principle states that accounting shall be done at the time of the periods of their happening. This eliminates reporting of related gains and recording of cash flows along with the transaction details.

·        Matching principle: Matching principle is used in accrual accounting. It states that you should record all related expenses when recording or reporting revenue. Not possible in cash accounting.

·        Revenue recognition: Revenue must be recognized to be reported. If it can’t be recognized by the rules set by regulators, it’s not revenue. Only once a transaction is complete and the invoice can be produced if demanded – shall it appear in accounting.

·        Materiality: You need to define what is immaterial or insignificant. If the transaction details would be different without the accounting of a record, then you must record it. If not, it’s up to the accountant’s senses.

·        Full disclosure principle: Any information that’s necessary to understand the contents of a statement shall be supplied along with the statement. Information disclosures, attached documents, footnotes, etc. are the ways to perform full disclosure of statements.

·        Going concern principle: The going concern means a company can defer some expenses. It stands on the belief that the company will continue to operate and not liquidate in the foreseeable future, long enough to fulfill its commitments. Therefore, you don’t need to record all expenses at once.

·        Conservatism: Conservatism keeps accounting from providing more gain value than what actually is. Losses will be reported as soon as they’re perceived, but revenue or asset gains only when they’re confirmed. If there are alternatives to recording, the one with less income will be shown. It also means that you’re showing a lower profit than reality.
·        Cost principle: Accounting shall only report the cost of the asset at the time of purchase, not adjusted to anything ever. This means the net worth of a company’s assets isn’t accurate, as it won’t be getting the same amount it paid for in the past if sold this day. This principle is slowly changing. 

     Contributed by Shawn Terry. Shawn is a skilled maths loving senior accountant. His strongest point is perhaps his affinity to using cloud-based modern tools to deliver faster results. His accounting methods are as swift as his fingers are on the keyboard. He is an explorer and always keeps finding something new to his accounting processes. To know more about his work, visit: 
www.site.pro
www.xtgem.com

     







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