Five Basic Accounting Principles That You Should KnowDownload Now: FREE GST 2023 GuidebookDownload Now: FREE Employment Pass ChecklistDownload Now: Free Incorporation Checklist
Accounting is the language of business, and it helps organizations to track their financial transactions and make informed decisions. It’s essential for any business to have strong accounting principles in mind to ensure the most accurate financial position. In this article, we’re going to highlight the five principles of accounting so that you can be well informed of the basics of good financial management.
Five Accounting Principles that You Should Know
- Revenue Recognition Principle
- Cost Principle
- Matching Principle
- Objectivity Principle
- Full Disclosure Principle
Revenue Recognition Principle
This highlights the period of time when revenues are recognised through the income statement of your company. If you are on an accrual basis, your revenues will be recognised in the period that the services were provided. For better understanding, the term accrual refers to accumulating or receiving (payments or benefits) over a period of time.
Alternatively, if you are on a cash basis, the revenues need to be recognised in the period the cash was received. With this, your business can provide accurate financial statements that reflect its true revenue and profitability.
This refers to recording your assets at their original cost rather than their current market value. Doing this allows you to properly record depreciation for purchased assets orderly. By adhering to this principle, you can prevent from overstating business assets and present a more accurate picture of its financial position.
Expenses should be matched to the revenues recognised in the same accounting period and be recorded in the period the expense was incurred. If there is a period of time where revenue was recognised on sold products or services, then the cost of those things should also be recognised.
The accounting data should consistently stay accurate and be free of personal opinions. Make sure the data is also supported by evidence that can include vouchers, receipts, and invoices to maintain consistency.
Full Disclosure Principle
The information on financial statements should be accurate so that nothing is misleading. With this intention, important stakeholders will be aware of relevant information concerning the finances of your company. Similarly, you can build trust between stakeholders with your company with the transparency.
How Accounting Principles Applies in Business Financial Management?
After learning all the heavy theories, what are the benefits that business owners like you can leverage from it? Here’s a list:
- Accurate and reliable financial information
- Identify financial trends
- Informed decision-making based on data collected
- Reduce the risk of fraud
- Build solid rapport and increase credibility with stakeholders
How can hiring a chartered accountant or outsourcing an accounting service benefit a company?
This can help businesses to stay up-to-date with the latest developments in the industry and improve their financial performance.
Hiring a chartered accountant or outsourcing an accounting service can bring several benefits to a company. Firstly, they can provide businesses with expert financial advice and help them to manage their finances more effectively. They can also ensure that businesses comply with financial regulations and avoid any legal issues.
Secondly, outsourcing accounting services can save businesses time and resources. By outsourcing, you can focus on business core operations and leave financial management to experts. This can also reduce overhead costs and increase efficiency.
Finally, outsourcing accounting services can provide businesses with access to the latest accounting software and technology. This can help businesses to streamline their financial management processes and reduce the risk of errors.
When in Doubt, Reach Out!
At Sprout, we want only the best for you!Let us take care of the heavy duties so you focus on what you do best. That’s why we offer budget-friendly expert accounting services to help ensure your finances are well-managed and organised! Feel free to contact us with any further questions about our services, we’ll respond within 24 hours.