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Basic Accounting Principles for a Small Business

Basic Accounting Principles for a Small Business

Even if your business does not come under the income tax net or other regulatory legislations currently, it is a good business practise to maintaining proper books of accounts. The benefits are many:

• Loans from banks for expansion purposes are available only upon showing free and fair accounting records.

• Proper records about sales, customers, suppliers, inventory etc help in getting information promptly.

• Proper financial data and analysis help make effective decision-making, budgeting.

• Accurate and updated records of profit and loss, cash flows, sales, purchases and expenses enable early detection of problems.

• Sound accounting system also serves as an effective internal control.

• Proper records also enhance a business’s competitiveness.

It is therefore imperative that books of accounts are drawn up with accurate information. The following principle can be a guiding light for free and fair recording and reporting:

Going-Concern Principle: This accounting principle assumes that a business will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future.

Matching Principle: The matching principle requires that expenses be matched with revenues. For example,salaries to employees are reported as an expense in the month when the employees worked and not in the month when the employees are paid.

Revenue Recognition Principle: The revenue recognition principle requires that revenuesrecognized as soon as a product has been sold or a service has been performed, regardless of when the money is actually received. This means that while your business would have made sales of say INR 5 lakhs in a month, you could have realise only INR 1 lakh in that month.

Materiality Principle: This principle requires the business to record only those expenditures/incomes which are significant in nature. Also, an asset that is of very low value can be written off in the very first year instead of apportioning over its useful life. Because of materiality, financial statements usually show amounts rounded to the nearest rupee, to the nearest thousand, or to the nearest lakhs depending on the size of the business.

Conservative Principle: The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains.If a situation arises where there are two acceptable alternatives for reporting an item, conservatism principle directs the business to choose the alternative that will result in less net income and/or less asset amount.

Basic Accounting Principles for a Small Business

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