Every business operating in the industry, small, medium, or big enterprise it may be, are expected and must prepare financial statements in compliance with the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants’ (AICPA)generally accepted accounting principles (GAAP).
With that, business owners need to have the knowledge and adhere to the accounting principles. Accounting principles are recordkeeping rules and procedures that ensure that accounting’s output, financial reports, is complete, consistent, and comparable.
If you have limited knowledge about accounting, you can look for the best accounting software for small business to help you record transactions.
Here are the five fundamental accounting principles for small business owners.
- Accrual Principle
According to this principle, money must be documented when it is earned, not when it is received. Similarly, whether or not an item has been paid, it must be recorded when it is incurred.
- Matching Principle
The accrual principle has been expanded into this principle. It states that if an income account and an expense account have a cause and effect relationship, they must be reported in the same accounting period.
- Economic Entity Principle
This principle emphasizes that the firm is a separate entity from its owners. The operations of the company must be kept and recorded separately from the activities of the owners.
- Materiality Principle
This principle highlighted that if an accounting standard has a moderate net impact on a company, it might choose not to implement it. In most cases, the materiality level is set at 5%. Ignoring a standard, on the other hand, should not result in a fraudulent financial statement reading.
- Going Concern Principle
This is principle is an underlyingassumption that the company will continue to operate in the near future. The going concern principle has an impact on the business’s accounting valuation and disclosures.
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