We have explored various sources such as books, magazines, and encyclopedia in order to get some information about Basic Accounting Principles or to be aware of its basic terms so that we would be able to manage our businesses well.
Generally, we come across the definition as similar as this is mentioned here about accounting is “The act of recording and maintaining the financial records and transactions of any business is usually known as accounting”. But wait for a moment, with these three written words “recording financial transactions” can anyone become an expert in accounting or know it well?
Of course, it won’t be enough at all, not for you or anybody else in this world. Accounting is a term that demonstrates how and when your financial transactions from revenue to expenditures including profit and loss must be recorded by taking care of and without the violation of any rules and regulations. And we sometimes describe these rules and regulations as the basic accounting principles which you must be aware of, even when you are a business owner and have opened any business of your own.
Involvement Of Financial Accounting Standards Board(FASB) In Accounting Principles
Financial accounting standards board(FASB) is a private nonprofit organization in the United States that has introduced basic accounting principles and rules as they believe that accounting is governed by some set of principles and regulations which we also call GAAP – Generally accepted accounting principles.
What Exactly GAAP – Generally Accepted Accounting Principles Is?
In order to assist small to large businesses who have stock to sell to people, GAAP has introduced some set of rules and principles for creating their financial statements.
Understanding Of Most Significant Basics Accounting Principles For Every size Of Businesses
No wonder, GAAP has filled up its stock with various accounting principles for businesses from basic to advanced but here we will look through most basic accounting principles that you should know to look after your business effectively.
1. Economic entity assumption
Well, the economic entity has a lot to understand about it and is considered one most crucial and basic accounting principles you must be aware of. But if we sum in one statement it is all about separating your business transactions from personal transactions with a separate business bank account.
Personal or house -related transactions from revenue to expenditures must not collide with business transactions this is the reason that your accountant always advises you to open a separate business bank account.
Even when you are a sole proprietor and your business activity appears on your personal tax return, the economic entity assumption still must be applied because, legally, your business can exist independently of you.
For instance, Consider, you have an online store of your own and you handle it with 4 members of the team as a sole proprietor.
Where your online business transactions will include the following things
- The transaction will be done for purchasing things you will be selling online
- The transaction will be done for building an online store with any of the website builders
- The transaction will be done for buying accounting software to manage financial records.
Above mentioned business transactions entirely must be separated from booking a ticket for a movie which is your personal transaction.
2. Monetary Unit Assumption
Monetary Unit Assumption is second of the basic accounting principles that must be kept in the head as it defines that all the financial transactions you carry out for your business must be recorded in the same currency. Expenditures, revenues, capital, assets must be recorded in the U.S values if it is not then it is not, it can not be placed in the business’s financial book.
3. Specific Time Period Assumption
This accounting principle tells you to record your business financial statements to a specific time period. The importance of the time period principle is to inform any readers about the time period for which the financial statements such as revenue statements, cash flow statements, profit, and loss statements have been made and recorded at a certain period of time.
Specific Time Period Assumption’s Objective – To describe the time period of when financial transactions were recorded.
When you record your financial transactions in your business accounting book, then items prices must be stored at their original and the same costs and make sure must not be altered at all.
Cost Principles’ Objective – In order to remind business owners not to caught between two stools such as cost and value.
5. Full Disclosure Principle
In this principle, you and businesses are responsible to report all required financial transactions and statements to a person who is familiar with reading this information.
Full Disclosure Principle’s Objective – Disclose all the relevant financial transactions in front of the people who are connected with that business for making sure that they should not be misled or lack by any information on financial statements.
6. Going Concern Principle
Not even a single reason or problem whether it is serious or not won’t work to make you discontinue your business in the future. This going concern basic accounting principles sometimes called “the non-death principle”.
Going Concern Principle’s Objective – Businesses will have to continue their financial objectives and commitments in the future. No liquidation will be done at all.
7. Revenue Recognition Principle
No matter when the payment for products and services will be made but certainly revenue will be reported once it is earned.
Revenue Recognition Principle – Reports Income and revenue when a sale is actually done.
8. Materiality principle
This basic accounting principle lets an accountant specifically used the best judgment in recording a financial judgment by finding out some actual error.
9. Principles of Conservatism
Here also accountants are required to use their best judgments to record financial transactions and statements when there are numerous ways are available to do it.
The major objective of principles of conservatism is it wants accountants to record expenditure and liability as soon they can along with income and profits.