The purpose of accounting principles is to ensure the accuracy of financial information, including both positive and negative information. A proper accounting system requires an organization to disclose both positive and negative information. The disclosure of important information in the financial statements helps readers understand the full picture and make a sound judgment. This principle assumes the business will continue to operate and requires that all accounting entries be recorded at the same time. In other words, the information provided in the financial statements should be truthful and unbiased.
The conservatism principle, for instance, encourages companies to record expenses and revenues as they occur, rather than wait until they are due. By applying the conservatism principle, companies can avoid recording expenses that are too high or too low. In addition, they should record assets and liabilities only when they are absolutely certain. While conservatism is a good principle for businesses, it can be difficult to follow at times. It’s best to follow accounting principles that align with the way you do business.
Accounting principles apply to the real world as well as the financial statements. For instance, suppose Company ABC and Company XYZ both sell widgets and incur costs. They both use accounting principles to determine how to report those expenses and revenues. Both companies will have to make internal and external financial statements to prove their profits. The State Board of Accountancy will audit their external financial statements, which will have a big impact on executive decisions and state appropriations.
In the case of revenue, it’s important to record expenses in the period they occur, irrespective of when the customer pays. Revenues are also reported on an accrual basis. Expenses must be matched with revenues, otherwise, they are recorded as a non-cash expense. In addition, a sale to a debtor on 5th August 2018 should be recorded, regardless of whether the debtor pays immediately. Likewise, a sale to an individual in debt of $2000 should be recognized on the same date.
An additional basic accounting principle reminds business owners that the cost of an asset is not the same as its value. Value changes over time, and the sale or depreciation entry will only reflect the change in value of the asset. To accurately value a business, it’s necessary to work with an appraiser. Fortunately, there are some basic accounting principles to consider that will help guide your decisions. This article will introduce some of the most fundamental accounting principles.
Accounting principles are generally accepted guidelines to follow when preparing financial reports. This means that companies must be prepared to handle stakeholder demands that demand that their financial statements are compliant with GAAP standards. They also lay the foundation for the development of better accounting procedures. Using these principles, companies can ensure the accuracy of their financial numbers. If you’re unsure of how to properly prepare financial statements, you can use an online accounting platform like Debitoor.