Whether you are an accountant, tax auditor, or a consultant, you need to be familiar with Accounting Principles. While they do not have to be all things to all people, they are the foundation for accounting.
There are eight fundamental principles that allow you to understand and make sense of your finances. These principles provide you with the basic rules of how the accounting department will operate.
One of the most important of the fundamental principles is Cost Accounting. This allows you to determine the cost of a given item and then divide it by the number of units produced or sold.
Accounting Cost is a very simple thing to explain, but one can be difficult to teach. One of the main advantages to accounting costs is that there is little margin for error in this area. You just need to do what you need to do to accurately measure your cost.
Another principle dictates that there should be a method of recognizing profits. Any business that has a profit made is recognized and rewarded, which eliminates the doubt of whether you have made enough to cover your expenses. When you use accounting principles, the profit must be recorded as income.
A third principle dictates that the costs associated with a service or product are tracked. When a product or service is sold, the costs associated with that sale are recorded. You can measure the rates of return, cost per transaction, and profit. Once the principle is established, then you can confidently make profit decisions and cut your losses.
A fourth principle is Money Accounting, which enables you to record and understand the price of goods and services. This principle is used to purchase and sell financial instruments and to buy and sell inventory.
The fifth basic principles are Inventory Accounting and Statement of Financial Position. With these principles, you will be able to keep track of your inventory, financial assets, liabilities, and revenue.
The last principle requires you to make a statement of cash flows. This statement is intended to tell you how much money you are generating from your business and how much you need to withdraw to maintain current operations.
Another principle dictates that you should make sure your records are kept accurate and complete. If they are not, then you may find yourself in some legal trouble, as opposed to figuring out if you are doing everything right.
Just because you are using accounting principles does not mean that you can throw them away when you leave your job. All of the principles provide you with the tools you need to be successful. Many of the principles require a lot of your time, but that is fine as long as you have enough to be successful.
When you are looking for a new job, it is good to have these principles available. Your clients will appreciate it and if they find out you are keeping an eye on your finances, they will come back again for your services.