Learn of the basic accounting principles, covering methods and types that a qualified accountant follow in his professional services.
The Basic Accounting Principles
These are rules of the Financial Accounting Standards Board, usually followed in conjunction with other government agencies. Accountants need to adhere to the established accounting principles as closely as possible. They need to set standards to ensure they produce proper accounting. They look for intelligibility and consistency of accounting data for different companies. Below is a list of the four basic principles and accounting terms with a brief explanation of each.
The equation for basic accounting is the foundation for all the accounting equation as it helps in determining the financial position of the small as well as large organizations. For sole proprietor businesses the assets equal liabilities plus owner’s equity. But for corporation the assets equal liabilities plus stockholders equity. Assets are owned by the company and liabilities represent what the company owes. This helps to show the financial condition of the company.
The accrual principle:
Businesses need to capture and report revenue at the time it is earned and realized by the company. They call this method period accounting. The purpose of this cost principle is to actually show what work has been completed in the accounting period. It is to show what a company accomplishes on an accrual basis.
The matching principle:
This principle allows a real-time analysis of income and expenses. The application of this historical cost principle will show the company’s performance during a period. Similar to the accrual principle, expenses, in this case, can only be recognized and reported if the revenue to which these expenses relate was received.
The disclosure principle:
The accounting of a company is necessary so as to make the assessment of a company’s financial status easy. However, there must be full disclosure of financial and accounting records so that there is no inappropriate expenses or erroneous options.
For any going concern, accountants may operate on other principles like entity principle, concern principle, objectivity principle, consistency principle and materiality principle.
Methods of Accounting
These methods are the set of rules, or “generally accepted accounting principles”, that help in determining how and when the receipts and payments reach the financial statements. Accountants use these according to the short term and long term needs of an organization. They calculate the earnings and expenses for a tax year with these methods in accordance with the accounting principles. This ensures entry of the accurate amount of taxable income in the books of accounts.
Organizations apply different procedures and different accounting concepts depending on the needs and requirements of the organizations. You will learn here of the cash vs accrual accounting methods.
Double entry accounting:
This is an accounting method that records transactions into two accounts which includes debit entries and credit entries. It is important that the debit entries and credit entries match, therefore it is necessary to follow the full disclosure principle for transactions. This ensures the use of correct balances for creating financial statements that will help you know the profits or loss of the organizations.
This method records transactions on the accrual basis where financial events take place, regardless of whether the payment takes place or not. The method lists transactions in books of accounts even if the payment is not made. This helps to show the net worth of the organization‘s financial information for a set time period. Businesses with inventory that sells on credit use this procedure so the receipts and payments of the business entity should match during a financial year.
The cash accounting method is where the monetary unit records incomes and expenses in the income statement as they occur during the period of accounting. Therefore, this involves recording all the payment received under the revenue recognition principle and expenses incurred in cash. It is an easy accounting for small businesses. These businesses do more transactions involving cash that do the large organizations where accrual methods are used. This is the best way of tracking the cash of the business by the recording of income and expenses as soon as they takes place.
Cash flow accounting:
This is a very simple and popular accounting method of calculating the actual flow of cash of organizations. A positive level of cash is an indication about the financial well being of an organization. There is monthly, quarterly as well as yearly calculation of the flow of cash where the use of the cash in an organization reflects the financial standing of the organizations. The cash flow statement is less important than the balance sheet or income expense statement. It helps in calculating the net cash of an organization.
A Look at Different Accounting Types
There are several different types of accounting with their own functions and benefits to a business, detailed on this site. You can follow these links to check them out: Business Accounting, Financial accounting, Forensic accounting, and Management accounting.