Last Updated 04 Jul 2021

Define the main accounting principles and explain how they affect the running of a business?

Category Accounting, Running
Essay type Process
Words 1858 (7 pages)
Views 619
Table of contents

Introduction

In this essay I am going to discuss and explain about the main accounting principles and also explain how they affect the running of the business. Accounting is generally concerned with calculating the profit and loss in a business and how the business is performing financially. In order to do this an accountant must collect analyzing and communicating financial information. The information is then used by the owners of the business and they see where action and decisions need to be made fast and also work out how much they are making and what they are losing and who owes them money and were debt needs to be paid. Accounting is also necessary for stakeholders to make decisions regarding the business and changes to the business as a whole if necessary.

In any case it is vital for the accounting information to be relevant in terms of what is appropriate when the information is analysed. The business should easily be able to access the information relevant to them to weigh up the upsides and downsides of the financial side of the business. One of the most important reasons the business would need the appropriate information to hand is to analyse what is cost effective and what exactly the business is carrying as a liability. The stakeholders then can use this information to make the changes.

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In businesses accounting is a necessity, because it is the process of managing, calculating and recording ones financial records. The management of a business’s financial record can involve the recording of various different transactions such as; expenses or revenues, this then helps individuals who manage financial system of the business to determine how much one owes or is owed, without basic accounting a business would not be able to function properly. (Financial-Dictionary)

In order to manage a business effectively account are considered as the main base for a successful business any errors could lead the business to a loss and put them in financial state it also states how much profit and loss the business is making a year which also help process the forms that we need to comply tax return forms to ‘Her Majesty Revenues Custom and Revenue and customs’ which is essential in every business .Account give a brief outline of the business financial dealing side but must be very accurate so they can compared every year to see what is occurring and any improvements that need to be made.( TheTimes100

The first accounting principle That I am going define is the Going Concern principle The term ‘Concern’ is based from the early 20th century which means that is a ‘business’ or a ‘enterprise’ Accountant’s believe a company cannot go bankrupt or broke, unless there is reliable evidence backing the assumption. The concept does not guarantee that a business will be making money and remain in the future time coming. This assumption affects the value of assets of the company and also help accountants to make financial statements in action of assuming and in order to know that the business will not go bankrupt or liquidated which means that whether certain liabilities of a company and find out for certain if assets and apportioning assets and converting them in to cash to pay of the depts. So based on the financial details and evaluation an accountant has on a business which helps predict that the business shall stay for the foreseeable future coming.

The concept also supports the assets of a business that it will remain for a period time for example machinery, land, equipment so that all the assets can be utilized which basically means that securing and getting complete benefit from what the business in earning but if the business is not doing as well as it should be doing then all the assets would be sold within a year paying of the creditors and bankers would be paid out and whatever money is remaining would be given to the owners of the businesses which would put the business where it started off they would have no debt to pay but would not really own anything .

Overall the concept predicts that the business will maintain to commerce for the time coming and give accountants the taste of what the value of the business assets are going to be like whether it is going to make profit or loss and also for the future accounting period predict whether revenue or costs .But however without this concept the accountants would have to write of all their assets in the current period and in the long-term period that still have profitability benefit in the future.

The other principle Separate entity principle this concept involves where the job of the accountant involves keeping all of the business transactions of a sole proprietorship separate from the business owner’s personal transactions. The reason behind this is because for the purpose of the accounting it is considered to be two different entities however for legal purposes they are considered to be as one.

The effect that this has on the business is that the personal expenditure of the owner is kept separate from any costs incurred by the business meaning the owner’s transactions will not show under the business statements. If this principal isn’t followed then this may result in tax implications on the business as the accounts will not show a true reflection on the two different sets of transactions.

Also the consistency Concept which basically involves that when accountants are using one method on a business they should use it the same for any events or transaction in a business. This method is very valuable for a business in order for it compare it results and when the accounts are l0ooked at they can compare accounts from previous years to see whether any profit or loss has happened example is depreciation, once a method has been chosen it should be used every year . (happy accountant)

Prudence principle

This concept is also known as the ‘Conservatism’ this involves accountants to calculate roughly in arranging periodic accounts which are used mostly by small business that have less inventories .If in business the stock that is sold has become damaged it shall be sold and recorded for a lesser value and not it original value and also be more precise about the value of assets and about the profit in a business and not to overestimate them. .This concept entitles you to be very accurate about your assets and profits in a business. The concepts affect the running of the business by clearing uncertainties that surround many transactions by taking a conservative approach to recording such transactions. Accounting principles

For example if you have a business you need to calculate all yeah business and yeah over head straight away .However one of the disadvantages of this concept is that it should not be used for overestimate potential losses which could mislead to business accounts.

Verification principle

This concept involves that all statements in business account must be effective and efficient and verified by and independent person so that all the total of the revenues and expenditures in a business must be the same figures as in the books, ledgers of the business.

The matching and accrual principles are closely linked. Accrual is a form of accounting while matching is a principle which almost goes hand in hand with accrual accounting. The matching principle means that a transaction will only be recognised wen income and expenditures are actually incurred and not on the timing of the cash flow. In simpler words it requires revenues to be matched with expenses. The accrual principle means that income received should be recognized in the same period as the relevant expenditure incurred in earning it. Cash may actually not even be received in that period but it will still be recorded.

Any company or firm that is trading publically is required use the accrual accounting. However it is generally seen as good practice so many businesses use it anyway even though they are not legally required to do so. This helped the creditors and investors in getting a clearer picture of the business’ account.

One of the main benefits of accrual accounting is that during a certain period it creates a more accurate picture of income earned. This is essential for management when they want to make operating decisions. Another benefit is that it helps with cost control as expenses are reviewed more or less as they are earned. Because the account is reviewed on a more regular basis managers can be held more accountable for managing the accounts.

Another principle is the historical cost convention this principle means that the value of items or assets on a balance sheet or financial statements will be recorded as a historical value and not it current value. In the term the historical cost is actually the cost that the buyer paid for the item or the asset in the first place. The cost is usually associated with the purchase invoice. However there is an exception to this principle which is the recording of ‘marketable securities’ which will be shown on the balance sheet on the financial statements in their current value. This principle leads to a state where after several years the historical cost of an asset or an item will bear very little resemblance to the market value.

And lastly the Materiality principle this principle basically means that although all important and relevant information is made available to all parties in questions, any information that is irrelevant or insignificant need not be shown or documented for the view of the parties in question. The reason for this is that the information that is irrelevant or insignificant does not influence the decisions of the parties in question. For example there will be information about the business that need not be communicated to an investor as it will have no bearing or influence on the decision that the investor may take. A term that is used is material facts. Facts that as less significant are not regarded as material facts. To grade the information as material and not material is fully dependant on the party who the information is for. For example a debtor would need see invoices raised and amount outstanding during a period and this information would be considered material. Also the level of detail can also be considered material or not material. It just depends on what level of details the party in question needs to see. And details that are insignificant can be left out as it is not material.

Conclusion

I think that Accounting principles are vital for business in order to see what is happening outside and inside of a business

http://www.accountingcoach.com/online-accounting-course/09Xpg01.html

References

  1. J.R.DYSON (2004). ACCOUNTING FOR NON-ACCOUNTING STUDENTS. GREAT BRITAIN: FT PRENTICE HALL. P36-40
  2. FRANK WOOD & ALAN SANGSTER (2002). BUSSINESS ACCOUNTING 2. : Financial Times /Prentice Hall. P143 -P149.
  3. ETER ATRILL & EDDIE MCLANEY (1995). ACCOUNTING AND FINANCE FOR NONE-SPECIALIST. HERTFORDSHIRE: PRENTICE HALL. PAGE 19
  4. legalzoom. General accepted accounting principles Stephanie Paul 2008[Online]. Available from:
  5. http://www.legalzoom.com/business-management/running-your-business/general-accepted-accounting-principles-or
  6. TheTimes100. Accounting Principles[Online]. Available from:
  7. http://www.thetimes100.co.uk/theory/theory–accounting-principles–112.php
  8. Financial-Dictionary. What is accounting ?[Online]. Available from:
  9. http://financial-dictionary.thefreedictionary.com/Accounting
  10. http://www.docstoc.com/docs/1929180/Basic-Accounting-Principles
  11. happyaccountant.The Cnsistency Concept [Online]. Available from:
  12. http://happyaccountant.wordpress.com/2007/04/13/the-consistency-concept/]
  13. http://www.accountingcoach.com/online-accounting-course/09Xpg01.html
  14. http://www.accountingcoach.com/online-accounting-course/09Xpg01.html
  15. http://accountingaide.com/examples/inventory-systems-perpetual-periodic.htm for periodic table words
  16. http://www.ehow.com/about_6323345_accrual-accounting-vs_-matching-principle.html
  17. http://financial-dictionary.thefreedictionary.com/Historical+Cost+Accounting+Convention

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Define the main accounting principles and explain how they affect the running of a business?. (2019, Mar 28). Retrieved from https://phdessay.com/define-the-main-accounting-principles-and-explain-how-they-affect-the-running-of-a-business/

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