Most of the business operations and the decision depends upon the financial records and statements. For making your decisions correct and beneficial, your business’s financial statements and records must be correct, complete, and accurate.
The correctness and completeness of records are only possible if businesses follow certain rules, guidelines, and principles. For ensuring the completeness and accuracy of an organization’s financial records, there are some bookkeeping principles. Your bookkeepers must know and understand these principles to avoid imbalanced sheets by the end of an accounting period or throughout the year.
Dig deeper into this article to explore some of the bookkeeping and accounting principles and identify their importance.
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Top 4 Bookkeeping Principles A Business Must Follow
There are certain standards and rules for keeping the financial information of a business or any organization. These principles are a must to follow and implement for every business regardless of the type they run.
Below are some of the most popular and important bookkeeping principles a business must follow for recordkeeping.
Revenue principle
The revenue principle states that you have to add revenue to your books at the point of sales. As soon as the buyer gets possession of services and goods, you have to record the revenue. This addition does not depend on whether the buyer has made a payment or not. Make sure you record them in the balance sheet successfully, else you will not balance the sheets. Businesses acquire the services of bookkeeping and accounting firms in Dubai to ensure accurate recording of a transaction when they should be recorded to get balanced sheets.
Expense principle
The expense for a business occurs as soon as they receive the goods, products, and raw material from any other source or provider. You do not have to record it as an expense after paying the service provider. An expense is added to the balance sheet as soon as goods are added. For example, your balance sheet will have changes in the assets and the expense section after receiving goods, irrespective of the payments are made or not.
Cost principle
The cost principle is also popular as the historical cost principle. It states that the cost must be recorded as the cash amount when it was purchased or acquired. For example, if a company owns a building or a vehicle, the cost of the assets must be recorded as the historical cost, not according to the current value in the market. Because changing the cost according to the current market fair will bring imbalances and differences in the balance sheet.
Objectivity principle
This principle is a must to follow while keeping your books. You must record all the transactions and records unbiased. You only have to add the records in your books that are factual and have evidence. It might seem easy and better to record subjective data in your books, but it is always better to record verifiable and factual data.
Top 3 Reasons for Following the Bookkeeping Principles
Not every data a business receive is meaningful and useful. Businesses need to know and identify the information they need to record and could be useful for them. This can only happen if the businesses are following the bookkeeping principles to record their data.
Following are the reasons for a business and organization to follow bookkeeping principles.
Accuracy
Following the bookkeeping and accounting principles enable businesses to record and keep accurate data. Businesses need to have accurate data and records because businesses made future decisions based on these records. Having inaccurate data will result in a bad decision by the authorities. Following these bookkeeping principles will allow you to record accurate and verifiable records.
Ease of access
Following these principles will make it easier for everyone to interpret and understand the financial statements and records. For instance, communicating in a language that everyone understands will be easier for everyone. Similar is the case with following these principles while keeping your books. The investors, the business authorities, and people auditing will find it easier to interpret your records if you are maintaining the data by following the generally accepted bookkeeping principles.
Completeness
These bookkeeping principles ensure that the records are complete by clarifying when and how a business should record its transactions. Incomplete and inconsistent records are of no use for any business. They become a source of fines and penalties for businesses if they fail to provide complete records to the authorities. For making your records complete, follow these bookkeeping principles to ensure the completeness and accuracy of your records.
Final thoughts!
While recording your transaction, make sure you follow the rules so that there are no issues and discrepancies with your records. You must also hire people who have the potential and skills to keep your records up to date complete.