Principles and concepts of accounting FA2 Maintaining Financial Records Foundations in Accountancy Students

basic accounting principles and tools

If the nature of your business is seasonal, you can tailor different factors like the frequency of your evaluation to this cycle. For instance, you might require more reviews of your accounting process during high season, and fewer during slower months. This part of accounting — tax obligation and collection — is particularly tedious. We highly recommend that you work with a professional to at least ensure your business is following the proper procedures and laws. You can also deduct payroll taxes, which are employment taxes paid on behalf of your employees (like Social Security and Medicare as well as federal and state unemployment taxes). (Hallelujah for modern-day technology, right? 🙌🏼) Check out solutions like Gusto, Zenefits, and Intuit Quickbooks Payroll.

  • Consistency refers to a company’s use of accounting principles over time.
  • When paired with your cash flow statement and a balance sheet, these reports help you understand the overall financial health of your business, and improve cash flow management.
  • Industry Practices Constraint – some industries have unique aspects about their business operation that don’t conform to traditional accounting standards.
  • This allows a company to see what percentage of cash (the comparison line item) makes up total assets (the other line item) during the period.
  • From recording information on floppy disks to maintaining records online on cloud-based accounting tools, the accounting profession has come a long way in using technology.
  • That means a credit entry is required in her trade payables account.

In this type of account, we find receipts, bank interest received, provisions, etc. It should be noted that assets and expenses are taken into account over a limited period, generally corresponding to the accounting period. Compliance with this accounting principle encourages the recording and presentation of information that is understandable by the various readers of financial documents. The accounting principle must present the operations carried out by the business in accordance with their nature and their financial and economic reality.

How getting qualified benefited one accountant’s business

If companies were able to pick and choose what information to disclose and how, it would be a nightmare for investors. Metro Corporation earned a total of $10,000 in service revenue from clients who will pay in 30 days. Metro Courier, Inc., was organized as a corporation on January 1, the company issued shares (10,000 shares at $3 each) of common stock for $30,000 cash to Ron Chaney, his wife, and their son. Get well-acquainted with analytical skills to become a future-ready accountant who can also function as a strategic partner offering intelligent insights to business leaders. The matching principle states that any expenses and the revenues they create should be recognized in the same period. The principle acknowledges that a cause and effect relationship exists between expense and revenue.

The beginning stockholders’ equity balance in the current year is taken from the ending stockholders’ equity balance in the prior year. Keep in mind that the net income is calculated after preferred dividends have been paid. Cost of goods sold for the current year is found on the income statement.

Conservatism principle

In this accounting concept, credit represents the right side of an account, while debit represents the left side. And in compliance with the principle of the double part, any transaction made at the debit level finds its counterpart in the credit of another account. The asset and expense accounts increase on the debit side and decrease on the credit side, while the liability and income accounts change inversely. In this accounting principle, records that have only small importance can be set aside.

Knowing how to use software has become a fundamentally essential skill in the field of accounting. Relating to the accrual principle, the revenue recognition principle says that a company should record revenue when a sale has been made or service is done, not when the sale and service are paid for. While the original value of an asset on the balance sheet goes unchanged, the difference between the original value and the lower market value is expensed every year over the course of the asset’s life. Knowledge is power, and understanding what your customers want and how your company can provide it often differentiates you from the competition.

Adhere to all income, employment, and excise taxes.

Create clear processes from the outset to make life easier for yourself. There are several core principles underpinning accounting which help to ensure accuracy and consistency in financial reporting. Being aware of these will help you to understand and manage the legal work that’s required for your company. Depending on their expectations, Banyan Goods could make decisions to alter operations to produce expected outcomes. For example, Banyan saw a 50% accounts receivable increase from the prior year to the current year. If they were only expecting a 20% increase, they may need to explore this line item further to determine what caused this difference and how to correct it going forward.

  • You may follow generally accepted accounting principles or a different standard.
  • The income statement shows the revenue, cost of sales, expense account, gross profit and net profit for an accounting period.
  • Basic bookkeeping ends and advanced accounting starts with the preparation of financial reports (also called financial statements), which show an overview of your company’s financial performance.
  • The analysis can help them with budgeting, deciding where to cut costs, how to increase revenues, and future capital investments opportunities.
  • Browse our list of top accounting firms and learn more about their features in our hiring guide.
  • Learn how to set up a small business accounting systems with this step-by-step guide.