Accounting is an essential part of any business, regardless of size or industry. It is the foundation to understanding financial transactions, making decisions, and planning for the future. Without basic accounting principles, it would be difficult to manage a business efficiently and effectively.

This blog post will serve as a comprehensive guide to basic accounting principles, helping you to understand the fundamentals of this important field. This guide will provide step-by-step instructions on how to get started on your accounting journey. This blog post will equip you with the knowledge and tools you need to successfully manage the financial side of your business.

We will not do the work for you, but we will help you answer some questions. Why is accounting important? What are the basic accounting principles? What is accounting spreadsheet? Is accounting worth the cost? Let’s find out what accounting actually is for and how it works.

Basic Accounting Principles and The Five Key Parts of Accounting

What is actually accounting? Here is the definition:  “Accounting or accountancy is the job of sharing financial information about a business to managers and shareholders (people who have invested in the business)”.

Accounting services help people control their money flow without making any mistakes. You need to know the foundations of the whole accounting process to start the actual work. Five important and significant transaction types are revenue, expenses, assets, liabilities, and equity.

Revenue

Revenue is the reflection of the customers value for the product. That is what you are going to get by selling something. It is the price and quality of the products sold.

Expenses

Expenses are the cost of running a business.

Assets

Assets are the material/non-material resources owned by the business that can be used to generate value.

Liabilities

Liabilities are the sum of money that your company owes.

Equity

Equity is the difference between what you own and what you owe.

Keeping in mind the small details of the whole picture will give you up-to-date information about the accounting process. Records of transactions, taxes, and projections help to understand the financial situation. You won’t have an objective answer to urgent matters without these financial statements.

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The Four Pillars Of Accounting

To make accounting successful, you need to use four key steps: Recording, Repeating, Interpreting, Analyzing.

Recording

This is where you record your business transactions. If you have visibility into your cash flow, you will be able to see if there are problems. The main benefit of this recording step is that you are always aware of what is going on in your business. At this point they are just a bunch of numbers, but this is a great start!

Repeating

It’s great that you got the previous month’s data, but it’s not enough. You need to compare all your business’ profits over a few months/years.

Important accounting details are required to do this. Even analyzing just 2 data sets can be important when evaluating the financial health of your business.

Interpreting

You have some data. What’s next? The purpose of these steps is to be able to read and interpret all the numbers you now have by the end of the month. This doesn’t mean just “1 is bad, and 10 is better”. You need to realize what these “1” and “10” stand for, and their implications for your business.

Analyzing

Once you’re done with the previous steps, you should have the complete picture. Now you can start to analyze everything your company accomplished during a specific time. This should give you the essential accounting knowledge to consider different possibilities that can either help or threaten your business.

Why Are Accounting Principles Important For Your Company?

Any accountant knows that accounting principles are the rules for reporting financial information within any company. They also know that the basic accounting principles are not just a set of rules. They are part of a system designed to provide investors and various stakeholders with reliable information about companies.

Accounting principles have a very material impact on any businesses, its longevity and its profitability. Without these accounting rules, financial statements would be pretty useless.

These accounting principles were created to:

• Make sure that the financial statements are consistent, comparable and complete
• Help investors control risk
• Control company performance and help make informed decisions
• Help investors assess the actual value of various assets/liabilities and equity

What Are The Basic Accounting Principles?

Basic accounting principles are the foundation for various kinds of financial reporting. Understanding these key ideas is important for anyone who wants to work in finance, be a successful business owner or effectively manage any business.

If you want to dive deeper into the wonderful world of accounting, make to sure to check out this excellent accounting book.

Accrual principle

The accrual principle is an important concept in accounting that requires all revenue and expenses to be recorded in the period in which they occur, rather than when cash is exchanged. This ensures that a company’s financial statements accurately represent its real economic performance for the period. Companies that use the accrual method of accounting are able to track their actual income, expenses, and profits to make sound financial decisions.

The accrual principle is a cornerstone of the Generally Accepted Accounting Principles (GAAP). GAAP is a set of rules, conventions, standards and procedures that accountants follow when preparing financial statements. It provides a framework that allows businesses to prepare consistent, reliable and comparable financial reports.

Conservatism principle

Your records should always gravitate towards expecting a loss (rather than hoping for a profit).

This principle states the importance of recording expenses and liabilities as soon as they occur. At the same time, assets and revenue are recorded only when there’s a certainty of them occurring. This way, lower reported profits will be shown because of the delays in assets and revenue recognition.

Consistency principle

The consistency principle is one of the foundational principles of accounting, and is a cornerstone of financial reporting. This principle states that once an entity has chosen an accounting method for a particular item, the same method should be used for that item in all future periods. This basic accounting principle is essential for the reliability and comparability of financial statements across different organizations.

The consistency principle is a key tool for assessing the accuracy of financial statements, and helps stakeholders make informed decisions. Consistency in accounting also allows for the ability to evaluate financial performance over time.

Cost principle

This principle states that any asset should be recorded in its original cost when purchased or acquired since this amount can’t be altered due to inflation or depreciation.

Economic entity principle

This means that business transactions should be recorded separately from the owner’s activities.

This means that the bank and accounting records shouldn’t be mixed with the assets and liabilities of different entities in a business. When recording business transactions, they should be assigned to the correct entity. Accountants do that to avoid mess in financial records and to make it easier to distinguish between business activities during an audit.

Full disclosure principle

Recording all information that may influence the reader’s understanding of the financial statements.

The principle says that all the accounting methods used by a company, should be recorded in the financial statements’ footnotes (or some other place in the financial document). Full disclosure principle makes sure that the accountants show all the necessary information into financial documents.

Matching principle

Any revenue should be recorded with the related expenses in the same period.

The principle makes sure that the earned income and related expenses must be accounted for in the same accounting period. If the income and expenses don’t correlate, the costs must be charged to expenses. This concept highlights the importance of recording the cause and effect of revenues and expenses.

Materiality principle

It entails recording a transaction if ignoring it might affect business decisions by the people reading the financial statement.

The principle states that according to SEC (securities and exchange commission) it’s recommended to record items that represent at least 5% of all assets on a balance sheet, even though GAAP standards don’t enforce the recording of immaterial transactions.

Reliability principle

This concept includes only recorded transactions that can be proven by official documents that auditors review.

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.

Time period principle

Time period principle means producing accounting reports over a standard period.

This principle says that businesses should create accounting records at the same time when they generate their financial statements. This is done to create consistency in reporting. It also allows managers to track the overall business performance based on various metrics from the records created on a monthly, quarterly, or annual basis.

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