Starting a business, whether it is small or big, has numerous obligations. Each responsibility should be addressed to avoid losses in the future.
Company owners have their own values and business ethics they adhere to. But no matter their belief, small business owners should know the five accounting principles to adapt and apply. Aside from these, they should use small business accounting software to streamline operations.
Accounting principles are guidelines in recordkeeping to ensure the consistency, completeness, and comparability of financial reports. It may be a bit challenging to perform business accounting, but with the help of the following principles, it might enlighten and help you with the business process.
Accrual Principle of Accounting
This principle is the idea of recording all the accounting transactions in the period they actually occur. It sets the rules for when to recognize the expense and the income.
The matching principle is also a part of the accrual concept. It presents a more accurate picture or demonstration of a company’s operation based on the income statement. As you provide a more precise and correct income statement, investors will have a better sense of the true economic state of the business.
Economic Entity Principle
The economic principle states that the business’s and owners’ financial activities should be separated. Each activity must be recorded independently to ensure that the entity principle is emphasized.
This fourth principle refers to the relative size of an amount. To determine the material of the business, you will need professional judgment.
Going Concern Principle
Going concern is an accounting term for a company that is financially stable. Meaning it is enough to meet responsibilities and continue operations for the probable future.
It can be challenging to adapt these principles overnight, but knowing them can make a big difference when running a company. Also, using the best accounting software for small business can help automate processes to improve operations.
For more details about the five principles that every small business owner should know, read the infographic below from KIPPIN, Inc.