Accounting Principles 101, Part 3

November 12, 2019 by OSYB Staff

Though only public companies are required to follow Generally Accepted Accounting Principles (GAAP), it is wise to follow them. if you have even a tiny inkling of going public. Changing over from non-GAAP to GAAP standards is quite time consuming and challenging. Intuit QuickBooks shares some GAAP principles that you should know and implement:

• Matching principle – instructs business owners to account for revenues and expenses on the income statement at the same time and is an example of accrual basis accounting
• Cost principle – requires business owners to record the cash amount of the asset when it’s obtained and the original cost of the asset is the same amount recorded in financial documents
• Revenue recognition principle – an accrual-basis principle states that business owners should recognize revenues as soon as they sell a good or service and essentially considers “Accounts Receivable” and “Income” the same thing.
• Going concern principle – primarily concerns liabilities and abiding by this principle means that a company does not intend to liquidate any time soon.
• Full disclosure principle – similar to the going concern principle, the full disclosure principle states that business owners should disclose information on financial statements if it’s necessary or relevant.
• Conservatism principle – clarifies what happens if you go to record a transaction, only to realize that there are two different ways to do so. This principle is the ultimate decider, stating that owners should choose the option that will result in lower net income.
• Materiality principle – gives accountants and bookkeepers a bit of leeway in their record keeping. It says that these parties can violate GAAP if the amount is insignificant.
• Monetary unit assumption – principle states that the US dollar is “king.” It forbids accountants from logging transactions in any other currency other than US dollars.
• Economic entity assumption – assumption is particularly relevant for freelancers and self-employed individuals. It mandates that these individuals separate business transactions from personal transactions, even though, legally, a sole proprietorship and a business’s owner are considered the same entity.
• Time period assumption – permits accountants to estimate amounts because they are working within short time periods, so long as the time intervals are distinct. Business activities are both continuous and complex. Accountants can provide estimates to help streamline the accounting process.

***

For full article and details: Accounting principles for small business owners

Image Credit: Deposit Photos