Bookkeeping requires adhering to basic accounting principles that are generally accepted in the bookkeeping practice. These principles must be universal among all bookkeepers for them to be of equal measure to value business’ financial standing.
Every business owner should have at least some knowledge of the basic accounting principles to apply in running a prosperous business. The business owner who does not have a time or an interest in learning these bookkeeping principles, it is advisable to hire a qualified bookkeeper who can help him or her to understand these principles. If you are interested to learn a short snapshot of the basic bookkeeping or otherwise also known as accounting principles, then keep on reading.
Double Entry Bookkeeping Principle
This refers to the relation between the debit side and the credit side of the journal. It states that for each credit entry, there is a corresponding debit entry. For example, an expense is debited while the cash account is credited. This applies if you use the cash to make an expense. This principle is based on the rule that states:
Assets =Liabilities + Equity
For the accounts to remain in balance, there has to be an entry on both sides accounts.
This is also known as the realization principle, and it states that for revenue to be earned in a business there has to be a corresponding sale. That can be either goods sold or services provided. Basically, this principle states that for the revenue to be realized there has to be a legally valid change of ownership of the goods or delivery of the service to another party.
This principle states that an expense is valid if the business receives goods or receives a service. This principle can be looked at as the opposite of the revenue principle. Receiving services from someone means that you have incurred some expense for those services to be provided. The bottom line is that for every good or service received there has to be an expense related to the goods or services.
This acts as the bridge between the revenue principle and the expense principle. It simply means that every revenue that the business receives, there must be a matching expense incurred to earn that revenue. Basically, there has to be an expense that relates to the revenue that a business incurs.
This states that all the amounts in the bookkeeping should be quantified by historical cost. For example, if you own an asset like an office building, the building cost will be shown on the balance sheet at its historical cost, and should not be adjusted to match the current cost.
This states that all the bookkeeping measures and reports should use an objective and factual data that can be verified. This means that as a bookkeeper you have to rely on subjectivity as much as possible.
There are some assumptions that relate to the business and should be referred to when doing bookkeeping. These include the going concern assumption and the separate entity assumption.