Mohamed Hesham

  • 2018-11-05 09:35:48

The 10 Basic Accounting Principles: 1- Economic Entity Assumption: Ever wonder why your accountant harps on you about keeping your business transactions separate from your personal transactions? This isn’t because your accountant wants to make their job easier (although, yes, separate transactions definitely do help!). The reason they won’t budge on this? The economic entity assumption principle. It basically means that a business is an entity unto itself and should be treated as such (which is also why this is sometimes called the “separate entity assumption”). This basic accounting principle is a large part of the reason why your accountant insisted you open a separate business bank account when you opened your business. Even in a sole proprietorship, where your business activity appears on your personal tax return, the economic entity assumption still applies. This is because, legally, your business can exist independently of you. so, we can say that the economic entity principle says that company owner and his/ her financials should be treated separately from whatever business entity he or she owns. 2- Monetary Unit Assumption: The monetary unit assumption principle dictates all activity be recorded in the same currency. This is why you have to go through the extra effort to complete your bookkeeping for foreign transactions. Another assumption under this basic accounting principle is that the purchasing power of currency remains static over time. In other words, inflation is not considered in the financial reports of a business, even if that business has existed for decades. There is also a monetary unit assumption that requires accounting completed in Egypt be in Egyptian pound. If a company does business internationally or otherwise receives currency from another country, that currency is converted to Egyptian pound for accounting purposes. 3- Specific Time Period Assumption: A balance sheet always reports information as of a certain date. Profit and loss statements, also called income statements, encompass a date range. All financial statements have to indicate the time period for the activity reported in order for them to be meaningful to those reviewing them. In short: Dates are really, really important! Always check your financial statements for dates. A balance sheet will indicate the report is “as of” or “at” a certain date. Profit and loss statements will indicate they are for a specific date range. 4- Full Disclosure Principle: The full disclosure principle is the generally accepted accounting principle that grabs the most headlines. Under this basic accounting principle, a business is required to disclose all information that relates to the function of its financial statements in notes accompanying the statements. This principle helps make sure stockholders and investors are not misled by any aspect of the financial reports. additional to that Accounting assumes that all relevant information has been provided. In order to be accurate, customers need to provide accountants with all the information they need and take reasonable action to check the accuracy of the figures provided. When accountants prepare their reports and files, they are considered accurate only as long as the information provided is accurate. 5- Going Concern Principle: Also referred to as the “non-death principle,” the going concern principle assumes the business will continue to exist and function with no defined end date. This principle is what lets a business defer the recognition of expenses to a later accounting period. If an accountant is concerned the business might be forced to liquidate, they have to disclose this under GAAP principles. 6- Cost Principle: The cost principle in accounting outlines that the cost of an item doesn’t change on the financial reporting. So, even if you’ve bought something within the year that’s skyrocketed in value—let’s say a building, for instance—even though its relative market value has changed, accountants will still always report the asset at the amount for which it was obtained. The basic account principle teaches something pretty important for small business owners in general: It’s important not to confuse cost with value. The value of things does change over time, and this is reflected in the gain or loss on sale of assets as well as in depreciation entries. If you need a true valuation of your business without selling off your assets, you’ll need to bring in an expert in business valuations rather than relying on your financial statements. 7- Matching Principle: For tax purposes, most small businesses are on a cash basis, meaning revenue is reported when cash is received, and expenses are reported when cash is spent (or your business’ credit card is charged). Certain businesses are required to report all financial information on an accrual basis, largely due to the matching principle. Under the matching principle, sales and the expenses used to produce those sales are reported in the same accounting period. These expenses can include wages, sales commissions, certain overhead costs, etc. Even if your tax return is on a cash basis, your accountant might prepare your financial reports on an accrual basis. Accrual basis reports reflect the matching principle and provide a better analysis of your business’ performance and profitability than cash basis statements. 8- Revenue Recognition Principle: Under the accrual basis of accounting, revenue is reported when it’s earned, regardless of when payment for the product or service is actually received. Similar to the matching principle, 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. 9- Materiality principle: The materiality principle is one of two basic accounting principles that lets the accountant use their best judgment in recording a transaction or addressing an error. We often see the materiality principle at play when an accountant is reconciling a set of books or completing a tax return. If the account is off by a relatively small amount in relation to the overall size of the business, the discrepancy may be deemed immaterial. Immaterial discrepancies can be disregarded, but material discrepancies must be addressed. Similarly, immaterial expenses can be recognized at the time of purchase, but material expenses must be depreciated over time. It’s important here for the accountant to be empowered to use their professional opinion. Since businesses come in all sizes, an amount that might be significant—or material—for one business may be insignificant—or immaterial—for another. 10- Conservatism: The principle of conservatism is the other principle that lets the accountant use their best judgment in a situation. When there’s more than one acceptable way to record a transaction, the principle of conservatism instructs the accountant to choose the option that’s best for the business they’re working with. It’s important to understand this principle is only invoked when either way the accountant can record the transaction is acceptable. It doesn’t allow the accountant to completely disregard other accounting principles


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