It is very important for entrepreneurs to be in the know when it comes to the financial aspect of their business. This is true even if you are not primarily responsible for your books and have professionals hired to take care of accounting. As owner, knowledge is crucial to ensuring that you understand the date being held and that you will not be confused about it, have it misinterpreted or worse have any employee take advantage with fraud. So what are the basics then? The best accountants Watford have rounded up the following for us.
ACCOUNTING PERIOD – This refers to the period or span of time with which the books are prepared. It runs for a length of twelve months and can be further divided into two types. The annual period is one which begins on any date as long as it completes the twelve month cycle. The fiscal year on the other hand starts on January 1st and ends on the 31st of December. There is no rule as to which period must be taken. Companies are given the liberty to choose among the two.
CONSERVATISM – Otherwise known as prudence, it is a policy that anticipates losses but not gains or in other words it requires companies to err on the side of understating assets and income and overstating losses instead of the other way around. This is done in the guise of uncertainty or doubt.
GOING CONCERN – This assumptions states that an entity provides will continue doing business for the foreseeable future long enough to carry out its mission, vision, goals, commitments and liabilities without any plan of liquidation. This is based on the fact that no company aims to invest with the end goal of losing and closing down.
MATERIALITY – An amount is material only if its addition or omission causes enough variance to significantly change a judgment or decision.
ACCRUAL METHOD – This principle necessitates that revenue is recognized when earned and expenses recorded when incurred regardless of whether or not actual cash has been received. Most companies follow this standard as it better reflects the entity’s financial position.
CASH METHOD – Quite the opposite, this recognizes revenues and expenses only when physical cash has been released or received. Although still present, the cash method is very seldom used today.
COST PRINCIPLE – This mandates that all assets and liabilities are to be recorded in the books with an amount equivalent to their acquisition costs and not their current market value.
Be sure to remember the above principles given by the friendly team of the best accountants Watford. Check out www.charterwells.co.uk.