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7 Accounting Golden Rules You Need To Learn

Accounting is a systematic process of the identifying, capturing, measurement, recording, classification, summarization, interpretation and communication of financial information. It is usually referred to as “the language of business”. Accounting practitioners are usually known as accountants. Accounting is a very wide field and is usually divided into smaller fields. Accounting is governed by a set of basic rules and concepts that ensure that financial information is analyzed and presented in a fair and understandable way. These accounting rules are formulated by certain accounting standard setting bodies such as the Financial Accounting Standards board and also professional bodies. Here are the main accepted accounting rules that you need to learn in order to generally understand accounting to ensure that you provide professional services;

Accounting Golden Rules

1. Going Concern principle


This principle stands by the assumption that an entity or company will be in existence and will continue with its operations for the foreseeable future. It is assumed that the entity has neither the plans nor necessity to cease its operation or liquidate. This assumption gives an accountant the authority to carry over to future accounting periods, prepaid expenses for the current year. It is usually up to the management to establish whether the going concern principle is suitable in the preparation of financial statements of their organization. If it is not, they will be force to prepare their financial statements based on the break up basis. This means that prepaid expenses form the current year cannot be carried over to the next accounting period. This also means that the organization’s assets will be recognized at their selling price on disposal rather than their net book values. This principle facilitates the preparation of financial statements and this concept enables the accountant to judge a business by its capacity to make profits in the future periods.

2. The Matching principle


This is an accounting rule that require accountants to use the accrual basis. The accrual basis requires that expenses that are incurred by an entity must be charged to the financial statement in the period that the expenses were incurred not when they are paid. For instance, employee wages are recorded as an expense in the income statement in the period when the workers performed their tasks and not when they were remunerated.

3. The Duality principle


This is another accounting rule that emphasizes on the double entry accounting system. The double entry accounting system ensures that all aspects of a business transaction are recognized in financial statements. Under this rule the accounting aspects of a transaction are classified under one of either two categories: debit or credit. The debit category represents an increase in either assets or expense or a decrease in liabilities and income while the credit category represents an increase in income and liabilities and a decrease in assets and expenses.

4. The Money measurement concept


The money measurement concept is also known as the measurability concept. This concept states that only those transactions and items that are measurable in monetary terms can be recognized in an organizations’ financial statement. However, those items that are not recognized due to lack of measurability in monetary terms sometimes require disclosure in form of notes in the financial statement. Most of the times, some items cannot be recognized in financial statements with precise amounts therefore the accountant has to come up with a reasonable estimate on the approximate value of the item being recognized.

Accounting Finance

5. Realization concept


This concept is also known as the revenue recognition principle. This concept is deals with the recognition of income or revenue using the accrual concept. This principle is similar to the matching concept only that this one deals with revenue alone. The realization concept states that revenue is only recognized by the seller only when it is earned and not when the cash is received.

6. Substance over form concept


The substance over form concept emphasizes on the importance of economic substance of transactions being recorded rather than only their legal form. This is done in order to provide the true and fair view of the state of the company. This concept involves the accountants’ judgment in order to be able to derive the economic sense of transactions that show the true state of the entity. Legal aspects of financial transactions are also quite important. However, at times they may have to be disregarded in order to derive more relevant and useful information.

7. Consistency


Accounting policies and procedures from different accounting periods should be uniform in order to facilitate analysis and comparison of financial performance in different periods. Any changes that are material even if it is a step towards improving technique should be disclosed. When accounting procedures and policies are followed consistently over many periods, an entities financial statement will be uniform and comparable.

Accounting is process of simply recording and presenting financial transactions and without principles we cannot be able to communicate the information recorded. This why people all across the world come together in order to formulate rules that will make financial statement across the world uniform and comparable. This has led to so many developments in analyzing different organizations’ financial performance and even the economy. The main goal is to maintain consistency and uniformity in accounting records. These concepts make up the very basis of accounting. All concepts have been developed over many years from experience and thus they are universally generally accepted rules.

Financial statements consist of statements such as: the statement of financial position, the statement for financial performance, the statement for changes in equity and so on. These financial statements have become necessary in all medium and large organizations. These statements became so widely used in the world that it became necessary for the accountants to develop some principles, concepts and conventions which may be regarded as fundamentals of accounting. The founding of these generally acceptable principles has led to so many developments in the world of business. These rules are the sole reason for standardization of accounting practices all over the world. Every accounting firm and the professionals in accounting industry should observe the above the rules to ensure the best practices.
 
 

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