Basic Principles Flashcards, test questions and answers
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What is Basic Principles?
Accounting is a fundamental process used to measure, track and report financial activity within a business. It is the language of business and provides an essential tool for making informed decisions about the financial operations of a company. The basic principles of accounting serve as the foundation for all accounting processes and procedures. Understanding these principles can help you make sound financial decisions in your own personal or professional life. The first principle is the going concern assumption, which states that businesses are assumed to remain in operation into the future, barring any unforeseen circumstances. This assumption enables companies to spread out their expenses over multiple years, instead of taking all costs upfront when they occur. The second principle is accrual basis accounting, which requires companies to record transactions when they occur not necessarily when payment is received or made. For example, if you purchase supplies on credit today but do not pay for them until 30 days later, you must record that transaction today even though no money has exchanged hands yet. The third principle is consistency, which dictates that businesses should use the same methods and practices from year-to-year so their records are comparable over time. If a company were to change its methodologies from year-to-year it would be difficult for investors or creditors to assess how effective their management strategies have been during those times periods since numbers would be incomparable from one period to another. The fourth principle is materiality this means that only significant transactions should be recorded in accounts; ones that could significantly impact decision making or profitability if left out (such as big purchases). This helps businesses focus on what’s important rather than wasting time tracking insignificant details in their books; it also allows them more leeway when making certain calculations since small mistakes don’t add up too quickly over time with this approach. The fifth principle is full disclosurecompanies must provide enough information about their activities so outsiders can understand what’s going on inside the company without having access to confidential data or documents. A good example would be providing detailed notes on an income statement along with explanations of any unusual items included in it such as extraordinary losses due to natural disasters etc.. Finally there’s cost benefitthis means companies must consider whether recording certain transactions are worth incurring additional costs associated with doing so such as hiring extra staff members or purchasing new software programs etc.