10 Principles of Accounting
Accounting may look like simple bookkeeping and tax preparation, but look deeper. Ask any accounting student, and they will tell you there is so much more to it. In fact, there are ten different fundamentals that shape all accounting activity, from tax preparation to corporate tax returns. Here is a look at all ten:
Revenue and Expense Principle
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The first accounting principle is the revenue principle. According to Cliffnotes, this means that revenue is earned when you actually make the sale — not when you actually receive the cash for your goods, services, or time. Like the revenue principle, with the expense principle, you incur an expense when you receive the goods or service, not when you pay the bill. This is called Accrual Accounting.
According to AccountingTools, in accrual accounting, you count the money you spend on something against the end value of that item. In the business world, this means that you count the expense of materials to make widgets against the money you make from selling those widgets when you actually sell them. In your personal life, this could include the money you spend on home repairs and offsetting those amounts from the house’s sale price when you sell it.
In some cases, an accountant may choose to adopt a cash accounting method. This means that income and expenses are recorded when they are actually received, even if it takes months.
All values in accounting are priced according to the cost principle. This means that the value of the assets you hold are listed at the cost you paid for them, not the current fair market value of the item.
The Chartered Institute of Management Accountants defines objectivity principle as the principle that says that all measures and figures used in accounting should be objective, verifiable, and true.
Accounting also uses a continuity principle. This means that for the purposes of bookkeeping, all businesses and assets are assumed to operate into infinity, according to the International Financial Reporting Tool. This might seem like an arbitrary distinction, but if you allow that a business will fail into your calculations, you have to account for asset disposal, resale values, necessary upgrades to make sure the business can continue, and so on, rather than deal with so many variables that are subjective.
Full Disclosure Principle
Accounting assumes that all pertinent information has been provided. In order to be accurate, clients need to provide their accountants with all the information they need and take reasonable measures to make sure the numbers provided are accurate. When accountants prepare their reports and filings, they are considered accurate only insofar as the information provided is accurate.
Economic Entity Principle
The economic entity principle says that a company owner and his/ her financials should be treated separately from whatever business entity he or she owns.
Monetary Unit Principle
There is also a monetary unit assumption that requires accounting completed in the U.S. be in U.S. Dollars. If a company does business internationally or otherwise receives currency from another country, that currency is converted to U.S. Dollars for accounting purposes.
The consistency principle requires accounts to pick one method or convention and stick with it.