The basic accountig principle says that you should not confuse cost with value. Items are not the same at all times and the value of an item is a function of time. This means that a gain or loss of an asset will only be reflected in a sale or depreciation entry. This means that you should always work with an appraiser when determining the true value of a business. Here are some examples of situations when the basic accountig principle may be applicable.
The revenue principle: If a business receives a property tax bill on December 15, it is considered revenue. The amount of that bill is known for the year ended December 31, but it is unknown for the three months ended March 31, 2013. Without this revenue principle, a business will rely on future payments and could go under in a matter of months. To avoid this, businesses should use the accrual basis of accounting. This method will result in more accurate and timely information.
The matching principle: This principle is used when the accounting period is similar. This will help users compare data over a period of time and provide timely information. Unlike traditional reporting, which is based on estimates, the information presented in an accounting report must be accurate and free of errors and bias. Moreover, it should be verified with objective evidence. The basic accountig principle requires that all operations of an enterprise be reflected and documented. This will include financial statements as well as notes.
Accrual principle: This principle assumes that complex activities are reported over short periods of time. This is because such shorter periods require more estimations. For instance, the tax bill received on December 15 is known for the year ended December 31, 2012, but unknown for the three months ended March 31, 2013. Similarly, the revenue recognition process is important in understanding the real nature of the revenue and the value of a business. If you want to avoid being cheated by your competitors, use the accrual basis of accounting.
The basic accountig principle has many benefits. It helps you get the most out of your accounting. First, it improves company cohesion. You can get the same results every month if different employees are working on the same principles. You can also improve the financial health of your business by implementing the basic accountig principle. This is the fundamental idea of a bookkeeping system. In other words, it ensures that you report the same financial information.
The basic accountig principle also encourages you to record expenses and assets as soon as possible. The basic accountig principle should be adhered to the letter in order to avoid mistakes. The key is to be careful and follow the rules. If you do, you will be more likely to be successful. And if you don’t, you will have no chance of surviving. If you don’t pay attention to this concept, you’ll find that it’s the basis for fraudulent behavior.