Understanding the Basic Accounting Principles

Understanding the Basic Accounting Principles

by GM Malik

Whether you are an accountant trying to work out the cca allowance of the employees of a company or an entrepreneur trying to work out the balance sheet, you need to learn about the accounting principles. However, learning about them is easier said than done.

If you’ve been searching online for the definition of accounting principles, you’ll have come across some not so great information. You might also have heard that there are no accounting principles and only a bunch of arbitrary rules. Well, that’s not quite true either. If you’d like to learn what they are, read on — here are the some of the most basic yet important accounting principles:

  1. Accrual Principle

The accrual principle is an accounting principle that requires businesses to record revenues when they have been earned. Even if they haven’t been collected yet. This means that companies must record expenses as soon as they are incurred. For example, if a company buys equipment on January 1. It will record the purchase in its books as of January 1. Even if it doesn’t receive delivery until March 15.

The only exception to this rule is for sales discounts and returns where the company does not owe money at the time of sale or return. A company that does not meet these criteria would be required to include the cost of those items in its financial statements.

  1. Cost Principle

The cost principle states that the cost of an asset should be recorded at the time the asset is acquired or completed rather than when it is sold (or disposed of). This makes sense because if there was no sale or disposal, then there would be no value for tax purposes.

  1. Matching Principle

This principle states that all transactions must be matched with their counterparts on the other side of the account. The matching concept is a basic accounting principle, and it means that all transactions must be balanced out between debit and credit accounts. For example, if an asset has a cash outflow of Rs. 1,000, then that amount must be debited from an asset account and credited to a liability account (or vice versa).

If there are no matching transactions in these accounts, then the balance will not be correct. Hence, all financial transactions must be matched with their appropriate income or expenditure account. If you sell stock to someone and receive cash in return, it has to be the same amount of money. If you write a check and deposit the funds into your checking account, those deposits must equal your checks.

  1. Consistency Principle

The consistency principle states that things should be done consistently with one another. For example, if you write checks and deposit cash into your savings account. Then your savings and checking accounts should also show balances at the end of each day.

If you purchase goods on credit and pay them off with cash later. Then the amounts should match in both statements (credit card statement vs. bank statement). This consistency principle ensures that both sides of every transaction are accounted for correctly so that they don’t affect each other’s numbers later on down the road when you try to calculate your business’s income statement.

  1. Conservatism Principle

The conservatism principle states that a company should not make an accounting entry unless it is absolutely certain that the amount to be recorded will be realised. This is because if there is any doubt about the correctness of an entry, or about whether the amount will actually be realised, then no entry should be made. The uncertainty may arise from uncertainty over whether a loss has occurred, or whether any profit has been made.

  1. Reliability Principle

The reliability principle states that a company must ensure that its accounting records are reliable. This means that they must be accurate and trustworthy. And that they should be prepared without undue delay, expense or effort. The reliability principle also requires that companies maintain adequate internal controls over their accounting records so as to ensure their accuracy and reliability.

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