The Four Basic Accounting Principles
There are 4 basic principles in accounting that are enclosed in the GAAP. The GAAP is a set of accounting rules, created and implemented by the Financial Accounting Standards Board together with related government agencies, that business owners use when documenting, recording, and reporting their financial records during a particular accounting period.
These basic accounting principles, together with the basic assumptions and constraints, are being used as guidelines by accountants and accounting firms in following a specific set of standards to ensure and keep proper accounting. This is crucial for entrepreneurs who wish to pursue company registration and set up business. However, not all CPA follow these rules.
If you want to account, understand, and compare your accounting data for your business, then you should learn and follow these basic accounting principles.
The Cost Principle: As a business owner, you are required to record and report all your assets depending on the actual cost incurred to get them, as opposed to their free-market value. This type of reporting under this principle makes it more reliable and reduces the opportunity for factors that might interfere with accounting, such as biased market values.
The Accrual Principle: As a business owner, you are required to record and report your revenue at you earn it, as opposed to getting the actual cash from your business’ revenue. This helps in showing what actual work has been done and not what else needs to be done in the future.
The Matching Principle: This refers to the real-time or actual evaluation of your expenses and revenues for your business, helping you indentify whether your business is doing well financially or not. Similar to the Accrual Principle, you should only be recording and reporting your revenue with which related expenses were earned.
The Disclosure Principle: This states that you can disclose your accounting records for quick judgment about your business’ financial status. However, be wary that this disclosure should not cause your business to accrue insignificant expenses.
While you may not have taken any accounting courses or acquired a license for being a certified public accountant, it is still best to know, at least, that the basic principles of accounting that will help you get an idea how to record and report your financial data of your business.