Ten basic guidelines in accounting
Economic Entity Assumption
Accountant conducts all business operations of an individual entrepreneur apart from the personal transactions of the business owner. From a legal point of view, the individual entrepreneur and the business owner are considered to be as one person, but in the accounting they are treated as two different persons.
Monetary Unit Assumption
This principle implies taking into account only transactions that can be expressed in U.S. dollars. So it is assumed that the purchasing power of dollar has not changed over time due to inflation.
Time Period Assumption
Under the Time Period Assumption, accountants prepare financial statement, find out errors and report the main aspects of the business’ financial position (assets, liabilities and equity)of the company for a reasonable period of time (year, quarter, month, week, etc.).
Cost Principle
“Cost” is recorded in the financial statements in accordance with its value at the time of the original purchase price.
Full Disclosure Principle
Full Disclosure Principle is one of the most important in accounting. The core of this principle is to disclose important information for investors or lenders. It is necessary to show this information in the statement or in the notes to the statement.
Going Concern Principle
This accounting principle assumes that the business will continue to exist despite of some financial difficulties. So the company may defer charge of the current period to the next one.
The Matching Principle
This principle implies that the expenses of the reporting period should be correlated with the income.
The Principle of the Revenue Recognition
An accountant should not confuse income with a cash receipt. How does the accrual method work? Income can be considered as valid one at the time when the product was sold. It does not matter when the seller has received the money. So an organization can register $ 30,000 income per month for work, while the real cash for this period of work will be $3,000 for this period of work.
The Materiality
The Materiality principle of accounting allows accountants to violate some other significant accounting policies but only in a case when the difference is small. Due to materiality, the final amount is usually rounded up to the nearest accounting unit, which depends on the size of the company.
A Conservative method
This method accountants use if there are two acceptable variants of the next decisions. The method of conservatism helps accountant to make a choice that will not lead to an increase of net profit.