Study tips: Accounting principles and why you should understand them

Study tips: Accounting principles and why you should understand them

3 basic accounting principles

If you need a true valuation of your business without selling your assets, then you’ll need to work with an appraiser, as opposed to relying on your financial statements. Over the past decade, technology has had a significant impact on the accounting industry. Computerized and online accounting programs now do many different things to make business operations and financial reporting more efficient.

If you adhere to these established principles, not only do you get reliable and sustainable workflow but also confidence in future growth. Reliability principle requirement is that accountants are able to present accurate and relevant information in an organization’s accounting records using proven evidence that the transaction exists. The examples of the documents that can be accepted as actual evidence are invoices, purchase receipts, bank statements, canceled checks, etc. Private businesses, non-profit organizations and other industry groups can adopt specific GAAP principles as they see fit.

Understanding the 10 Fundamental Accounting Principles

Following this principle, accountants can organize financial records in a conservative manner – lower reported profits will be shown due to the delays in assets and revenue recognition. Basic accounting principles are the foundation for all other financial reporting. Understanding these concepts is essential for anyone who wants to work in finance, be an effective business owner or manage a company. Accounting principles have an essential impact on businesses and their profitability.

3 basic accounting principles

Every small business must complete its bookkeeping basics to produce accurate accounting reports regularly. Double entry creates at least two accounting entries for each transaction. While it is possible to rely on others to do the accounting work for you, it is essential to understand the concepts to ask the right questions and get the information you need. This guide will explore the key accounting knowledge that all small business owners should know. Once an accounting standard has been written for US GAAP, the FASB often offers clarification on how the standard should be applied.

Reliability principle

It is treated as a real account since it is an asset to the business. Credit – It is the opposite of debit and it means a decrease in the value of an asset or expense or an increase in the value of liability (including equity) or revenue. Debit & Credit – According to the nature of an account, it could mean either an increase or a decrease.

GAAP prepared financial statement, looking at inventory, for instance, you know you are looking at a dollar figure, not a number of physical units. Suppose a firm purchases land for $20,000 and a building for $100,000. Objectivity Principle – financial statements, accounting records, and financial information as a whole should be independent and free from bias. The financial statements are meant to convey the financial position of the company and not to persuade end users to take certain actions. Conservatism Principle – accountants should always error on the most conservative side possible in any situation.

Fundamental Accounting Concepts and Constraints

Prepaid expenses are expenses paid in advance, such as insurance premiums or rent. Assets are divided between current and long-term assets on the balance sheet. Current assets are those that can be turned into cash within one year, while long-term assets are those that cannot convert to cash within one year. Each account can be represented visually by splitting the account into left and right sides as shown. This graphic representation of a general ledger account is known as a T-account. The concept of the T-account was briefly mentioned in Introduction to Financial Statements and will be used later in this chapter to analyze transactions.

Using data analytics effectively can help businesses increase revenue, expand operations, maximize customer service, and more. Historically described as “paper pushers” who track financial information, today’s accountants need to learn about big data and data analytics as part of their continuing education. Not long ago, an accountant’s work finished when business financial statements were finalized and tax forms were ready to be filed with federal, state, and local governing bodies. Bookkeeping, the system used to record a firm’s financial transactions, is a routine, clerical process.