As the pandemic brought new challenges to the business industry, accounting function becomes more vital in running a company as it helps you track income and expenditures, and especiallymake valuable financial decisions.
Your enterprise can be more strengthened in this time of pandemic if you have a thorough understanding of the different accounting principles. These accounting principles are the standardized rules and guidelines that businesses must adhere to when reporting financial information.
If your business is relatively new and small and has a limited understanding of accounting, you can look for the best accounting software for small business that can efficiently help you with your bookkeeping.
Here are the five accounting principles you should know.
- Accrual Principle. According to this principle, money must be recorded when it is earned, not when it is received. Similarly, regardless of whether an item has been paid or not, it should be noted when it is incurred.
- Matching Principle. This principle is an extended concept from the accrual principle. It tells that if there is a cause and effect link between an income account and an expense account, they must be reported in the same accounting period.
- Economic Entity Principle. This principle dictates that the firm is a different entity from its owners. The firm’s operations must be recorded separately from the activities of the owner/s.
- Materiality Principle.This principle asserts that if an accounting standard has a minor net impact on a company, it can choose not to implement it. Typically, the materiality threshold is set at 5%. Ignoring a certain standard, on the other hand, should not result in a false reading of the financial statements.
- Going Concern Principle. This is an assumption that the business will continue to operate for the foreseeable future. The going concern principle has an impact on the valuation and disclosures of the business’s accounts.
You may visit KIPPIN, for more information.