What are 5 Fundamentals of Accounting | maijson GKB.

There are 5 Top Fundamentals of Accounting.

                    - Revenue Recognition Principles

                    - Cost Principles

                    - Matching Principles

                    - Full Disclosure Principles

                    - Objectivity Principles  

 

1. Revenue Recognition Principle:

This principle states that revenue should be recognized in the accounting period that it was realizable or earned. So, revenue is recorded when products or services are rendered. This is important because stakeholders need to know the true financial position of the company so they can make more informed decisions.

Accounting Period is a specific period of time used to record financial transactions and prepare financial statements. This period can be a month, quarter, or year depending on the start and end dates of the accounting period. At the end of the period, the accounting specialist or bookkeeper will prepare financial statements.

Revenue: The representation of the money a business has earned by sales or services during the financial year, revenue is calculated by subtracting the cost of revenue from the total revenue.

Expenses: It includes fixed and variables like advertising, rent, utilities, transport, electricity, water, telephone, employee wages, and business insurance. Fixed expenses remain constant, while variable expenses can change depending on the amount of business completed.

Profit and Loss: This is calculated by subtracting all general and administration expenses from the gross profit or loss.

Financial Position: Also known as the balance sheet, it shows the company’s financial health, includes assets, liabilities, income, and equity or capital.

2. Cost Principle:

The cost principle requires a business to record transactions at their original cost. The cost is determined at the time the transaction is completed, and not adjusted if changes occur after that. This principle applies to all assets including land and buildings, equipment’s etc. It is also requiring that the business to record liabilities when cash is initially exchanged.

Tangible Assets: Tangible assets include items like cash, stocks, bonds, real estate, office equipment, and furniture.

Intangible Assets is which has no physical existence, like intellectual property and goodwill.

Market Value is the estimated value of an asset or property on the open market. For example, market value can be used to determine the value of a business’s stock market shares.

3. Matching Principle:

The matching principle states that expenses should be matched to the revenue they help generate. Expenses should be recognized in the same period as the associated revenue instead of when they are billed. The principle makes sure that the business net income is accurate and a reflection of real performance. It also makes sure that the expenses are not artificially inflated in one accounting period to offset revenue from a previous accounting period.

Net Income: Net income is the difference between total income minus total expenses for a given accounting period. It is also used to calculate ratios that show the health of the business including return on assets, return on equity, and price-to-earnings ratio.

Return on Assets Ratio – is calculated by dividing the business net income by its total assets. The ratio provides an indication of how efficiently the business is using assets to generate income:

Return on Equity Ratio: It is calculated as net income divided by shareholder’s equity, higher the ratio, the more profitable the business is.

Shareholder’s Equity: It represents the difference between a business’s total assets and total liabilities. It is calculated by subtracting the business’s total liabilities from its total assets, and then divided by the business’s total number of common shares outstanding.

Common Shares: Ownership of a company where the holder is entitled to a portion of the business’s profits and assets.

Preferred Shares: Ownership of a company where the holders have a fixed dividend rate that has priority over common stock.

Price-to-Earnings Ratio: It is calculated by dividing the current market price of shares by its earnings per share (EPS). The P/E ratio can help investors understand if a stock is under or overvalued.

Earnings Per Share: It is calculated by dividing the business’s total earnings by the number of outstanding shares of stock. This measurement allows investors to compare businesses of different size.

4. Full Disclosure Principle:

The full disclosure principle in accounting states that essential information must be disclosed to all owners and stakeholders in a timely manner, regardless of the nature of the information, whether it is positive or negative. Management is assumed to already have full knowledge of the positive and negative information.

5. Objectivity Principle:

The objectivity principle of accounting requires that financial statements are prepared based on objective evidence and reflect only facts. This principle helps ensure that financial statements are accurate, impartial, and free from bias. Any changes to the financial statement must be clearly documented. Objective evidence is based on facts and can be verified independently whereas subjective evidence based on personal opinion and cannot be validated.

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