Just ask any CEO, senior management executive and businessman. They will confirm this one simple fact. Whether you are a small-scale start-up or a large MNC, you need a strong accounting team to enable financial stability and sustainable growth. Accountants take stock of the company’s financial past, present and future. They use accounting principles to ensure all financial matters are productively and efficiently handled.
The beauty of accounting is that it offers a universal language for all businesses. Qualified professionals rely on established standards and practices that help regulate the industry. Accountants do more than record and analyse financial data and statements. They also ensure the company follows a universal system of standardised procedures. It makes things easier, cleaner and transparent.
So what are these accounting principles? While there are quite a few that every accountant must know, here are eight important ones that top the list.
8 Accounting Principles that every Graduate should know
Accounting principle #1: BUSINESS ENTITY CONCEPT
When scanning through a company balance sheet, accounting professional Priya noticed a few irregularities. She dug a bit deeper and discovered that the chairman’s business travel expenses also included a few personal bills that had not been sanctioned. This led her to follow the accounting principle of the business entity concept.
The business and the owners are considered two separate entities. They are not the same. You can’t include your private transactions as part of the business expenditures. Even the assets and liabilities of the company are restricted for business purposes only. This is essential as mixing business and private dealings can lead to a false understanding of the company’s finances. The business entity is always distinct from the owner’s entity to ensure all transactions are accurate and transparent.
Accounting principle #2: MONEY MEASUREMENT CONCEPT
Ramesh is an ACCA-qualified professional who understands the value of accounting principles. He judiciously follows the money measurement concept. When he records employee salaries, he doesn’t take note of the employee’s skills or educational qualifications. His only focus is on the numerical values. His focus is on quantitative data, not qualitative.
That is the money measurement concept. Accountants will only record monetary transactions. You cannot register quality, skills or external environment factors in financial reporting. You only keep your eyes on the figures and money values, nothing else.
Accounting principle #3: DUAL ASPECT CONCEPT
Sachin is an accountant for a leading retail brand. He has to record the transactions for September and create a financial statement. He registers the finances according to the double-entry accounting system, which has a debit and credit column.
He does this to ensure all expenses and payments are methodologically listed.
Debits are transactions where money comes in, and credits refer to money that moves out of the accounts. This accounting principle is called the Dual Aspect Concept. For instance, Sachin records sales at the shops as debits but registers electricity bills, employee salaries and other expenses as credit. This way, the books balance perfectly and all money is accounted for.
Accounting principle #4: MATCHING PRINCIPLE CONCEPT
Rajesh is an accomplished accountant who works with a renowned software firm in Mumbai. His company has a product that cost Rs 2 lakhs to create but sold it for Rs 5 lakhs. Rajesh uses the matching principle to list the cost of developing the product and the revenue generated together. Rajesh can track the cost and revenue at the same time.
This accounting principle ensures that every income or sale has an equivalent expense recorded with it so that the profit and loss for a period of time are accurately measured. The matching principle acknowledges that a business should record expenses along with the revenues.
Accounting principle #5: ACCOUNTING YEAR CONCEPT
Every time the company closes the financial year, accounting professional Sachika is ready to uphold the important accounting principle. She maintains all the financial records for the year. She also ensures all expenses and revenues of the past 12 months are accurately calculated. Sachika’s efforts enable the successful conclusion of one financial year before the next one begins.
Whether yearly or half-yearly, every company must maintain their financial records for that chosen time frame. These annual or bi-annual statements inform shareholders, employees and investors about the fiscal health of the company for the accounting year.
Accounting principle #6: PROFIT REALISATION CONCEPT
Chetan is an accounting wizard who works for a construction business. The company has just landed an enormous contract in Dubai for a large commercial property development.
They have received an advance, but it will take a while for the project to be completed. Chetan is well aware that the advance doesn’t count as income. He will apply the profit realisation concept and only calculate the revenue earned once the project is finished. That is when he will examine all the receipts. If there are any losses due to delays or any unexpected expenses, Chetan will have to factor those in. Only then he can accurately establish the profit generated from this project.
This accounting principle ensures that accountants don’t make any errors when recording profits. You should not recognise revenue before the goods or services have been successfully delivered to the client.
Accounting principle #7: GOING CONCERN CONCEPT
Seasoned accountant Anjana works for an auto parts manufacturing company. She follows the going concern concept when creating records, balance sheets and financial reports. She does not list fixed assets such as factory machinery or infrastructure for sale as these are important for the company to carry out its operations. They are not considered saleable assets and won’t be liquidated in the near future.
The going concern concept is an important accounting principle that assumes a company will continue to be profitable in the near future and not be liquidated. This assumption means that the major fixed assets of the company are not listed as saleable goods.
Accounting principle #8: CONSISTENCY CONCEPT
When Subhash joined the accounting team at a retail company, he was instructed to use the FIFO method during inventory valuation. He could not switch to the LIFO technique even though it was the norm at his last office.
Every organisation decides which accounting methods work best for them and sticks to those without fail. There must be consistency across the various departments. Financial statements, balance sheets and other reports must adhere to a universal code that is pre-decided upon by the company decision-makers. The consistency concept is a core accounting principle that guarantees that all documents and processes are uniform in nature.
Top 5 courses for budding accountants
Can work with leading multinational financial companies, the big 4, banks and other renowned global institutions.
Can work as a management accountant, business analyst, finance controller, forensic analyst and project accountant.
Companies such as L&T, Accenture, PwC, IBM and Godrej are known to hire CMA professionals.
Can work as a chartered accountant, taxation expert, financial advisor and internal auditor
Can work as a chartered accountant for any business, company, government organisation or individual in India.
How Proschool can help further your career in accounting
If you are looking for the best place to learn accounting principles and lots more, IMS Proschool is one of India’s top coaching institutes. The academy is known for its innovative teaching methods, experienced faculty and a practical approach to learning. Proschool offers several accounting and finance programs known for their high industry standards. Students are exposed to real-world scenarios and projects that help them grasp the concepts better. If you’re hoping to become a global accountant with a pulse on the future of business, Proschool can make this dream a reality.
- Proschool offers relevant accounting courses such as ACCA, CIMA, IFRS and financial modelling.
- There are several centres for learning set up across India. You can also enrol online for virtual sessions.
- There are many learning resources available for students such as mock tests, e-videos, practice papers and prep books.
- Proschool has an active placement program for certified students to land jobs within the industry.
- Students receive additional assistance with interview etiquette and resume writing skills.
- The teachers are experienced accounting experts who specialise in relevant topics such as accounting principles.
What is the best course to learn accounting principles?
There are a number of certifications that offer an intensive study of accounting concepts, standards and principles. Some of the more renowned ones are ACCA, CIMA and CA.
How long does it take to finish a course in accounting?
The duration of your course depends on your choice of certification. Each course has a specified time frame. For example, the ACCA program can take 2 to 4 years, and the CA might take 4 to 5 years. However, if you are eligible for exemptions, you may complete the course quickly.
Accounting principles are an integral part of accountancy. Every qualified professional will follow these codes to the best of their abilities. It is vital, that as a student, you fully understand and grasp each concept as they will lay the foundation on which you will build your career. Once you have fully imbibed these principles, you are well on your way to becoming a successful accountant.