Business accounting is based on nine main accounting principles. These principles are generally accepted in the accounting field around the world, so whoever works with them can be recognized as professional by other professionals abroad.
Anyone who runs a business knows how important gathering and organizing financial data is. If all the process was done in a hazardous way, business accounting would be almost as complicated and complex as quantum Physics. Accounting needs of any corporation are taken care of with the help of the nine principles which set the basis of managing the financial data. This way, everything that is connected to the financial activity of an entity can be easily understood by any accountant.
The accrual principle is the basis of all the other principles. By applying the accrual principle, the revenues and expenses of a business are recorded in a methodical way at the time the money gets earned, not paid for. In the high financed businesses world, the accounting has a set way for recognizing the money. In order to be sure the interpretation of the recognition is right, the revenue recognition principle is followed.
The financial data is filled in with the help of the historical cost. This way, accounts can immediately tell what the sold item cost, just by looking at the balance sheet. The current cost is an accounting feature that can be sometimes mistaken for the cost principle.
Constancy principles help businesses keep an accurate record of their financial transactions. Each time a financial transaction is done, the information is recorded in the same way, so it won’t get confused in time.
However, constancy principles may lead to wrong financial figures if wrongly mixed with other principles. This is a common way for illegal activities to deal with their financial information, in order to mislead the tax auditors.
Business owner’s expenditures should be kept separate from the business records in the financial accounting. This is why the concept of separate legal entity is used by accountants. This way they differentiate the business financial transactions from other personal banking transactions the owner may perform. In the case of small businesses, it often happens that owners use money from the business accounts for their personal needs and record this in a wrong way.