13October 2017

Company Accounting- Principles Discussed Here

Every company needs certain accounting standards according to which the economic and financial operations of a company are governed. These accounting standards are compiled into certain principles which are listed below. Company accounting assignments revolve around these principles. These can be summed up as below:

  • Accrual Principle: This principle states that financial transactions should be recorded in the period in which they are done and not after that. This will create confusion while making account statements. It is the foundation of accrual basis of accounting. For example, if you record an expense when it is made (ignoring the accrual principle), it might become a very lengthy delay suffering your relationship with the dealer.
  • Time Period Principle: It states that the financial reports should be reported in a specified period of time. This helps in the better analysis of the business transactions. It helps in creating a standard set of time periods which are comparable.
  • Conservatism Principle: It states that expenses and liabilities should be recorded as soon as possible whereas the revenues and assets when they actually occur. It helps to record losses earlier making it closer to reality and making stronger business decisions.
  • Revenue Recognition Principle: It states that revenue should be recognized only when the business has completed the earning process. Otherwise, it may be taken as fraudulent activity and can be a false standard setting in the business.
  • Consistency Principle: It states that you should follow an accounting principle as long as possible unless a better principle comes across. Lack of consistency may behave erratically in the business and may result in difficult decision making.
  • Reliability Principle: It states that only those transactions should be recorded which can be proven for reliability. It helps in the time of auditing where auditors favor concrete evidences of transactions.
  • Cost Principle: It states that a business should record its assets, liabilities and equity investments at their original purchase costs only. It is becoming obsolete as the businesses tend to adjust their assets and liabilities to improve their business repute.
  • Monetary Unit Principle: It states that a business should record only that transaction which can be stated in terms of a unit of currency. It helps to assess the prices of assets.
  • Economic Entity Principle: It states that transactions of a business should be kept separate from other business transactions and those of its owners also.
  • Materiality Principle: It states that if any account transaction is not recorded in the account statement, it will affect the decision-making process of a company.
  • Matching Principle: It states that when you record the revenue, you should also record all concerned expenses also.
  • Full Disclosure Principle: It states that all information concerned with financial statements should be included in the final accounts so that the concerned authorities can understand the essence of the statements.
  • Going Concern Principle: It states that the business should be considered to be or remain in operation in the coming future. It indicates that you would be justified in deferring the recognition of some expenses like depreciation.

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