Basic Accounting Principles

Anyone who worked in an office had to work in accounting at some point. They’re the people who pay and send bills to keep the business going. Although they do more. Sometimes referred to as “bean counters,” they also track profits, costs, and losses. Unless you run your own business and act as your own accountant, you have no idea how profitable – or not – your business will be without some form of bookkeeping.


Whatever your business, even if you’re just balancing the checkbook, it’s still accounting. It’s even a part of a child’s life. Saving pocket money, spending everything at once – these are accounting principles.


In what other companies is accounting very important?

Well, farmers have to follow careful accounting procedures. Many of them manage their farms year after year by taking out loans to grow crops. If it’s been a good, profitable year, they can pay back their loans; Otherwise, they may have to continue the loan and incur higher interest costs.


Every business and every individual needs to have some sort of accounting system in their life. Otherwise they could lose finances, not knowing what they have spent or whether they can expect a profit or a loss from their business. Keeping track of accounting, whether for a multi-billion dollar business or for a personal checking account, is a necessary daily activity if you’re smart. Failure to do so can mean anything from a bounced check to reported losses for company shareholders. Both scenarios can be equally devastating.


Accounting is basically information

and this information is regularly published in companies as an income statement or income statement. Accounting was defined by William A. Paton, professor of accounting at the University of Michigan, as a fundamental function: “facilitating the administration of economic activities. This function has two closely related phases:

  1. measuring and compiling economic data
  2. communicating the results of the process to interested parties.


For example, business accountants regularly measure profit and loss for a month, quarter, or fiscal year and publish those results in an income statement called an income statement. These statements include items such as receivables (what the company owes) and payables (what the company owes). Things like retained earnings and accelerated amortization can also get tricky. This is done at a higher accounting level and within the organization.

Much of accounting though, is also concerned with basic bookkeeping. This is the process that record every transaction: every bill paid, every penny owed, every dollar and penny spent and accumulated.


But company owners, who may be individual owners or millions of shareholders, are most concerned about the transaction summary included in the financial statements. The annual accounts summarize the assets of the company. The value of an asset is what it cost when it was first acquired. The financial statements also state where these assets come from. Some assets are loans that must be repaid. Profit is also a business asset.


In the so-called double-entry bookkeeping, liabilities are also summarized. Obviously, a company wants to report a higher amount of assets in order to settle liabilities and report a profit. Managing these two elements is the essence of accounting.


not every company or individual can set up their own accounting system

The results will be messy!, If everyone involved in the accounting process followed their own system or no system at all, there was no way to really tell whether a company was profitable or not. Most companies follow what is known as Generally Accepted Accounting Principles, or GAAP, and there are large books in libraries and bookstores dedicated to just this one subject. Unless the company discloses otherwise, anyone reading the financial statements can assume that the company has adopted GAAP.


When GAAP is not the principle used to prepare financial statements, companies must make clear what other forms of accounting they use and are required to avoid using titles in their financial statements that could mislead those who audit them .


GAAP is the gold standard for preparing financial statements. The company’s failure to disclose that it used principles other than GAAP makes it legally responsible for data that is misleading or misrepresented. These principles have been refined over decades and effectively govern companies’ accounting policies and financial reporting systems. For different types of businesses, such as B. for-profit and non-profit companies, governments and other companies, different principles have been established.


However, GAAP is not dry. They are guidelines and therefore often open to interpretation. Estimates must be made from time to time and require good faith to achieve accuracy. You’ve no doubt heard the phrase “creative accounting,” and that’s when companies push the envelope a little (or a lot) to make their business look more profitable than it really is. This is also known as massaging the numbers. This can get out of hand and quickly become an accounting scam, also known as a cookbook. The results of these practices can be devastating, ruining hundreds and thousands of lives, as in the case of Enron, Rite Aid, and others.