Basic Accounting Principles and Its Significance in Accounting

The term accounting is often associated as a service activity and as such, it has to conform to basic accounting principles. Basic accounting principles involve providing of information in terms of monetary value. It will financially interpret the activities of the business or personal transactions of individuals in order to arrive at better decisions. 

Generally, the basic accounting principles of any businesses are recorded in books of accounts where transactions are posted on a regular basis. These records will now be reflected and summarized in basic financial statement forms such as the “Income Statement” and the “Balance Sheet”, respectively. The former shows the results of business operations whether there is profit or loss. The latter on the other hand, reflects the financial condition at any given period of time.

Basic accounting principles provide that the revenues, expenses and net income or loss are incorporated in the “Income Statement”. Revenues are incoming assets of the business brought about by services rendered or goods sold. On the other hand, outflows of assets will stem from payment of liabilities and costs of goods and services called expenses. The resulting difference between revenues and expenses will either be a profit or a loss. If there are more revenues than expenses, this means that there is profit while the opposite would be a loss. 

On the basic accounting principles pertaining to the “Balance Sheet”, it should contain the business assets, liabilities and owner’s equity. Assets pertain to items owned by the business with economic value. They are assigned with a certain price based on acquisition cost. Conversely, liabilities are the legal obligations due to individuals or other businesses. 

Basic accounting principles provide that the excess of business assets over its liabilities is called the owner’s equity. On the contrary, the owner’s equity will have a negative balance if liabilities exceeded the assets. In this case, the business is not doing well since the owner has more debts than ownership to show for as a result of his operations. The owner’s equity is a term used for businesses owned by individuals. On the part of businesses registered as corporations the incorporators’ ownership is called “Stockholders’ Equity”. 

These basic accounting principles should be consistently reflected so that readers or users will not misinterpret the items contained in the financial statements. In all material aspects of basic accounting principles, it should only contain business transactions that are separate and distinct from the personal dealings of owners.  

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