Basic accounting principles that every business should know
Hey there! TallyDekho is here to acknowledge its valuable readers about the basic accounting principles that every business should know for conducting business operations in a balanced way. In this article, we’ll discuss the most commonly followed accounting principles and this will definitely help the businesses to apply the same in their operations accordingly.
There are several rules and general guidelines that a business applies to maintain the business standards. Also, if a company presents its financial statements to the interested parties like customers, creditors, government, financial institutions, etc, then it has to follow some rules and guidelines. These rules and guidelines are generally referred to as accounting principles. However, the accounting principles are prepared in accordance with GAAP (Generally Accepted Accounting Principles). Therefore, the accounting principles framed as per GAAP, aim to standardize the business accounting activities and regulate the other business operations as well.
However, there are numerous key benefits of integrating the accounting principles and guidelines in business activities. Some of the benefits are as follows:
- Financial Statements become more accurate and reliable
- The credibility of the business enhances
- Business activities become more consistent
- Brings greater financial transparency
Major Accounting Principles
The generally accepted accounting principles represent a complex set of guidelines and principles, therefore, simplifying the same, let’s discuss the main accounting principles that are most commonly used in business.
Economic Entity
This principle says that an accountant while managing the accounts should keep the business transactions completely separate from the business owner’s personal transactions. It’s because, in accounting, business and business owner are seen as two different individuals.
Time period Assumption
Generally, an accounting period consists of a quarter, six months or a year. Thus, the time period assumption states that business life can be segregated into equal time intervals as per the various requirements of the business. However, this principle helps the business to analyze its financial performance and evaluate the improvement level achieved so far in that particular time interval.
Monetary Unit Assumption
This concept asks the business to record all the transactions and events in monetary units. It’s because monetary units are considered stable, secondly, money is seen as the language of business. Therefore, all business transactions should be expressed in monetary units.
Cost Principle
We know that the value of an asset changes over time; thus, the cost principle of accounting says that the monetary value of the assets should be recorded at book value (Value when it was originally acquired or purchased) even after years of purchase have passed. It is also referred to as the historical cost principle.
Full Disclosure Principle
There are several interested parties of business like investors, creditors, financial institutions, etc, and this principle states if a business finds that certain information is important for any of the interested party, such information must be fully disclosed in the footnotes of the financial statements prepared for safeguarding the interests of them.
Going Concern Principle
This accounting principle says that a business should assume its long-term existence and carry out all the activities and objectives following this vision. However, if the accountant finds the business will not continue in the future, this information shall be disclosed in the financial statements of the concern.
Matching Principle
This principle encourages the use of accrual basis of accounting in the business. The matching principle requires the business to record the expenses as and when they become due. For example, the wages to be paid should be recorded when they become due and not when they’re actually paid.
Revenue Recognition Principle
This revenue recognition principle requires the business to record the revenue as and when a product or service is sold, it doesn’t matter if the revenue is received or not. Thus, if the business sells a product/service, its sale should be recorded when it’s made without seeing if the cash is received or not.
Principle of Materiality
This principle requires the accountant to judge the materiality of the monetary items whether it’s important to record it or not. For example, recording a stationery item of Rs.30 will not show any material impact in the financial statements. Thus, the business accountant should make the decision accordingly considering the materiality of the transaction.
Principle of Conservatism
The principle of conservatism asks the business to play safe. It says that if the accountant finds two acceptable key points in preparing the financial statements, the accountant should go for the alternative that shows less net income.
It’s now pretty clear that if a business follows a suitable set of accounting guidelines, it will surely help the organization in going up and establishing its credibility in the market. However, it’s not important to implement all of them but an accountant should adopt some of them in accordance with the type of business considering the end goals and objectives. Stay connected for more interesting articles. Feel free to share your feedback.
