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What are the golden rules of accounting? If you have ever read a book about business, or maybe attended an MBA program, you would have heard these memorable words before. However, these rules have acquired new relevance, or a more accurate description, in recent times. After all, one can easily compare business and accounting today. For instance, we now have the internet and mobile computing; the world is essentially a global village. The concept of the "transaction cost" has been around for a long time, but it is now being increasingly applied in business.
The methods and principles that underlie accounting, and therefore the essential foundation of how business is conducted, are known as the golden rules. These are simple, elegant principles that have withstood the test of time and continue to be an essential part of how many manage their finances and business operations. However, these principles and rules have become increasingly less important as time has gone by and as accounting and bookkeeping have become more specialized and complex. This article attempts to summarize and introduce some of these more complex, but important, rules and principles.
The four primary principles considered to be the bedrock of accounting are:
- Accounting is an art.
- There are no set rules that can be applied uniformly.
- No single principle can be regarded as the ultimate rule.
- There are no universal principles applicable to all situations.
These are just a few of the many ideas that abound in the pages of bookkeeping and accounting textbooks. In addition, new ideas are realized every now and then. Plentii understands the most common thread running throughout all of them is acknowledging that there is still room for improvement.
As far as business is concerned, all companies would agree that consistency and reliability are paramount. Bookkeeping and accounting form the basis for all businesses. Without it, there can be no business operations, no consistency in decision making, no accurate recording of data, and ultimately, no profit at all. Similarly, when we typically speak of accounting principles, we refer to rules that are universally accepted and apply to all businesses. The very terms themselves show the diversity and complexity of the subject matter. In other words, accounting and bookkeeping can be considered as a way of life, and as such, there are as many rules governing the subject as there are rules of physics.
The laws governing the behavior of individuals under financial obligations are called rules. They must be understood, obeyed, and enforced. As with most sets of rules, there will be exceptions. This is why, even with a large amount of rules, if one or two are violated, there is little to be done about it.
But this is not so with accounting and bookkeeping. There are procedures to follow, and they must actually be followed. There is nothing arbitrary about them. Audits must be conducted, accounting statements must be prepared, reports must be given to stakeholders, and only those on a need-to-know basis can request them. Plentii understands that this is a world unto itself, and with every procedure, there is a rule specifying how it must be followed.
Any competent accountant or business owner can tell you that the first, second, and third priority of doing business is getting organized. You can have the best-looking organization in the world, with the most expensive accounting system, and yet still, without an organized business, no one will be able to access the information it contains.
The business owner must also keep in mind that rules exist for a reason. Rules exist, so that future generations will learn from, and follow them. Otherwise, someone can come along and redefine them, or they could just be ignored. This is the beauty of the free market, where competition with rules can really work to your benefit. Nobody wants to compete with everyone else; they all want to create a marketplace where they do their best work at the lowest prices possible.
Most accounting and bookkeeping practices are based on the principle that transactions should be processed in the order that they were placed. This is a basic, fundamental principle of accounting that is universally accepted and practiced. It is actually a straightforward principle to understand and implement. However, the reality is that accounting practices are usually based on an unlimited number of assumptions and complicated mathematical calculations. To help you better understand this principle, we will discuss some of the more complex concepts used in accounting.
The first rule is that all transactions must be recorded in order. For any transaction to be recorded, it must be entered into the appropriate accounts. Allocating transactions to different accounts is the basis for doing so, and there are different types of allocation. Some entail classifying transactions according to their nature, and others assign them to particular asset classes. There is even a special category of transactions that are deemed as long-term and are recorded for a set period of time to ensure that all of the required recordings are completed.
Another important rule is that all transactions must be closed at the end of the financial year. While it is practically impossible to guarantee that every transaction will be completed in a timely manner, it is common for all transactions to be recorded in order regardless of their type or duration. The accounting records must be maintained for a minimum of five years. This rule is intended to help ensure that accounting methods and principles are strictly followed to avoid erroneous credit conclusions and minimize any potential claims of fraud.
One of the most important sections of all accounting procedures is the reconciliation of financial records at the end of the year. The reconciliation procedure involves comparing the beginning of the year with the end of the year in order to determine whether there have been any material adjustments made to the accounting records. These adjustments may involve changes to the original accounting assumptions, adjustments to the reported results of the process, or even changes in the transactions' classification. While all of these may appear relatively small, they can collectively result in many adjustments that may significantly affect the year's reported results. All changes in the accounting procedures must be reported in the final statement.
Fundamental to the operation of the accounting profession is the requirement of uniformity. This requires all the various rules and principles followed by accountants to ensure the accounting reports' accuracy, are uniformly applied to avoid inconsistencies with other accounting practices. Uniformity also contributes to the standardization of accounting reports, which will ultimately benefit the public.
The requirement of trustworthiness is essential to accountants. Accounting includes conducting financial analyses in order to create financial statements of the business's financial condition. For an analysis to be conducted, and reports of its findings considered accurate and trustworthy, it must be conducted by people who are deemed reliable and trustworthy. A requirement of trustworthiness is not just about the accuracy of the financial statements; it is also about the integrity of the people who conduct the analysis. Therefore, any accountant who is considered trustworthy must be granted a seal of approval from the International Organization for Standardization (OSI) to remain in compliance with the accounting principles outlined in the US Generally Accepted Accounting Principles (GAAP).
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Then there is the balance sheet. The proper and most accurate measurements of the company's assets, liabilities, and ownership interest are determined by adequately measuring its net assets at the end of the reporting period. This rule requires that only the relevant entries to the preparation of the balance sheet should be included in the statement of accounts. Other entries that are not relevant to the balance sheet should be reported individually or separately as necessary.
You must learn and follow the rules, or your books will never be ready. If you cannot account for income properly, or if you cannot document the way your business expenses are being handled, then you may as well forget about ever running an accounting department of your own. It simply is not worth the risk. Contact Plentii today to take all of these tasks off your plate!