As your businesses grow, you need to be able to establish a strong accounting foundation. Grasping basic accounting principles will allow you to conduct your business financially and make the right decisions to ensure the business's long-term continuation. In that respect, here is a simple guide to key principles of accounting that every entrepreneur should know.
Importance of accounting principles
Accounting principles give a background on which recording and reporting of financial transactions are based. They ensure that the financial statements are presented consistently and accurately to track performance easily, manage resources, and observe regulatory laws. To the entrepreneur, a good understanding of these principles assists in ensuring that records of finances are clear and accurate for business planning and expansion.
The accrual accounting principle
The accrual accounting concept is a fundamental idea underlying the generally accepted accounting principles. It defines the recording of revenues and expenses at the time when they are earned or incurred but not necessarily when cash changes hands. You get a better picture of how your business is doing because the revenues earned plus expenses incurred over a stated period may not necessarily coincide with the timing of money changes hands.
Consistency principle
Consistency in accounting means that the same methods and principles remain the same from one period to another. In this way, comparability of the financial statements for period-to-period analysis becomes easier because the same methods have been used in both years. Therefore, the ability of the entrepreneur to compare the results with a high degree of accuracy periodically and thereby enhances the reliability of financial reporting.
The principle of prudence
Prudence or conservatism, however, is a principle which favours recording expenses and liabilities at the earliest moment possible and records revenues only when realised. In such a manner, financial reports are not shown to be overly optimistic but rather show a prudent look at the position of the business concern. To this end, it guards the entrepreneur against overestimation of profits and makes certain that losses are accounted for as they occur.
Going concern principle
Going concern principle: This is one of the timeless principles that assumes that a business entity will remain operational throughout a predictable future. The going concern principle affects the acquisition and reporting of assets and liabilities.
For instance, rather than using the market value, assets are carried at cost; moreover, long-term liabilities still appear as they would be settled in the long run. In relation to entrepreneurs, this would mean that it enables them to make some decisions in strategising a business for a very long period and also to determine the stability of the business.
Matching principle
The matching principle dictates that expenses must be recognised in the same period as the revenues they helped generate. This, in turn, serves to match the costs of earning revenues against income from such revenues. This provides the presentation of profitability. This would allow entrepreneurs, through this principle, to establish more precisely the profitability of certain activities and projects.
Materiality principle
This is why the materiality principle allows the inclusion in the financial statement of only financial information that is significant. This means information is considered material if omitting it or misstating could influence decisions by users of the financial statements. For entrepreneurs, a focus on material information means that financial reports provide relevant and useful information without being encumbered with trivial details.
The reliability principle
The reliability principle implies the presentation of valid and verifiable financial information. Financial statements prepared for business enterprises should be based on objective evidence rather than on personal opinions or estimates. For entrepreneurs, the aim is that financial records must be reliable, trusted, and used with confidence when making business decisions.
Applying accounting principles to your business
The first step in ensuring a good accounting foundation for a business is the selection of appropriate accounting methods and principles. How to apply such principles includes the institution of an efficient bookkeeping system, frequent perusal of statements, and updates on accounting standards and best practices.
In addition, you may consult professional accountants or financial managers to advise you properly whether your accounting practice is credible and compliant with regulatory requirements.
Wrap up
The elements of accounting are applicable and highly important for any entrepreneur who wants to provide a very sound financial basis. Knowing and mastering the important accounting principles such as accrual accounting, consistency, prudence, going concern, matching, materiality, and reliability will really enable you to control your finances and make relevant decisions that support the long-term success of your business. Good bookkeeping from the beginning will ensure that your business is able to avoid most pitfalls that come along with finances, setting it on the path of growth.
