Basic accounting principles

Every company must adopt these basic accounting principles when preparing their company accounts.

Going Concern

Generally, every company must prepare their accounts on the assumption that the business will continue to trade in the near future. Therefore a going concern business.

Should your company is going to prepare the accounts not on a going concern basis. This fact has to be disclosed in your director report and notes to the accounts. So that the readers (suppliers, bankers, creditors, shareholders, staff and other interested parties) of your financial statements understand your company financial and trading position clearly.

You must also make account for the costs as a result of ceasing your company in your accounts to reflect true situation of your business.

For example, you may incur redundancy payments to employees or early termination of contracts penalty and so on.

Carefully, you may have to mark down your company assets value to their actual realizable value in the open market. For example, for a quick sale your company car may have to be sold at under market value. It is that price would be your realizable value. In contrast, your unfinished products may have to be completely written off the profit and loss account unless you can sell them as it is.

Consistency

Broadly, your directors must select suitable accounting policies. This includes depreciation of company assets, foreign exchange translation policy and accounting for stock valuation and apply them consistently. Thus this would allow your readers to make your company performance comparable from year to year.

Prudence

Universally, your company accounts should be prepared on prudence basis. This means you account for profits that 100% realized only in your company accounts. No estimates or guessing figures. In other words, sales should not be recognized in the profit and loss account until the goods or services have been supplied and after the invoice is raised.

Similarly, you must recognize the losses in your company account as soon as possible. This includes providing for the costs or writing down any asset whose value has been impaired as soon as appropriate. For example, you should recognize bad debt or write off obsolete stock in your profit and loss account as soon as you become aware of them.

Accruals Concept

The introduction of the accruals concept is to match costs against revenue so as to achieve accurate profitability for the relevant accounting year. This concept also helps to prevent deliberate deferring company tax liability. For example, you made a sale of £500,000 on 30 December 2018 and you only issue your sale invoice on 15 January 2019. Your accounting year end is 31 December 2018. If your accounts present according to the date of your invoice. Effectively, you are shifting your company tax liability to 2019 accounting year.

For that reason, accruals concept will put it right. If you made the sale in 2018 accounting year then the sale income must be accrued in the 2018 account. The same applies for business expenditure.

This is why prepayments, accruals, capitalization of long term assets are introduced.

Historical Cost Convention

Typically, you must recognize the revenue, costs and assets bought in your accounts at the original cost regardless of present value.

Netting Off

Principally, you should not net off any items in your company accounts.

Departure from accounting principles

Thus, a departure from any of these basic accounting principles would require a disclosure notes in your accounts. You must also state the reasons for the departure.

Overall, your accounts must always give a true and fair view.

1 Comment

  1. Gaston J Author December 25, 2019 (6:19 am)

    It is really a nice and useful piece of information. I am happy that you shared this useful information with us. Please keep us up to date like this. Thank you for sharing.

%d bloggers like this: