The Basic Accounting Principles
If you are someone new to business, planning to put up one, a current or prospective investor, an accounting student or is simply someone who wants to learn a few of the basic accounting principles then you’ve come to the right place. Here are a few of these that you should know of. Gather your pen and paper, read up and feed your knowledge!
Going Concern Assumption
Here, it is assumed that an entity will proceed as continuing in business for the foreseeable future and long enough to carry out its stated objectives and commitments without any plan of liquidation. The reasons for such include the following. First, businesses are established in the hopes of it being a successful venture where its expansion and growth can be advantageous to many generations. In short, you do not put up a business with the hopes of closing it in the near future. Second, if it is believed that the business will not be carried on, such has to be disclosed.
This states that income should be recognized when earned regardless if cash is received or not. At the same time, expenses are recognized when incurred regardless if cash is paid or not. This replaced the cash method to better match costs against revenue for better accuracy and timely reporting.
Conservatism or Prudence
Accounting entails professional judgement which should come with a degree of caution. A company should not recognize assets at a value higher than the amount expected to be received for its sale or use while liabilities should not be reported at an amount lower than its value in the future. It also states that when in doubt, choose the solution that will least likely overstate assets and income.
This principle requires assets and liabilities to be recorded and reported at their historical or acquisition price and not their present values which can fluctuate on a daily basis depending on the market.
An account or value is said to be material if its addition or omission would be material enough to change the judgement of a reasonable individual, if not it is said to be immaterial. Here professional judgement is used by the accountant to determine if something is material or not.
This requires accountants to fully disclose all important and material matters to stakeholders in the financial statements and its notes.