Basic Accounting Principles: Know the Facts from a Professional - August 22, 2009
If you are a business owner or an individual who deals with the keeping of financial record, it is important that you follow the basic principles of accounting. This is very important since without these basic principles, your business will be a failure. These principles are called GAAP which is the acronym of the Generally Accepted Accounting Principles. However, you should also consider the appropriate guide lines for accounting to win the trust of the companies.
Basically, there are two different bases on which the most of the business accounts are developed – the accrual basis and the cash basis. In the accrual basis procedure, the transaction is tracked according to the credit owed to the company and owed by the company. This is done regardless of the cash payment. On the other hand, the cash basis accounting puts particular importance on the cash transaction such as the transfer of cash. Here, the expenses are recorded only after the actual payment is made.
In most of the cases, the small companies follow accounting on the cash basis. This is largely because the number of transactions is limited here and they can be recorded easily. At the same time, the owners of the small business can evade the tax by manipulating their revenues by recording the cash as received in the next financial year. However, the large companies do not have this facility since the amount of transaction is large. Also, they have the fear of losing their reputation in the public and shareholders. This is why the large companies prefer the accrual method.
However, regardless of the method of accounting taken up by a company, it is absolutely important that the company has an accounting information system in hand. However, it may seem difficult for the small companies to set up such a system. But, once you invest here, it is sure to provide you with more accuracy and functionality.
Basically, the work of the accountant is to record and analyze the financial transactions of the company. To that end, he performs the following task. First of all, he jots down all the transactions in a particular book. Then, these transactions are analyzed and published in the ledger. Once this is done, the transactions are summarized and published as financial statement.
There are two different types of financial statements – the balance sheet and the profit and loss account. The former is the list of the liabilities and assets owned by the company at that particular period of time. On the other hand, the profit and loss account deals with all the expenditure and profits made by the company at the given period. The financial statements are extremely important for the employees and owners of the company. Third parties like the government, and public too, have a lot of interest in them.
The accountant is important since he is the person who delivers all the information. At the same time, an experienced accountant will give you vital advices when it comes to purchasing an existing business.
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