Accounting: Understanding The Basic Principles

Topics: Business, Depreciation, Balance sheet Pages: 3 (806 words) Published: February 26, 2013
Understanding the Basic Principles of Accounting
By Stephen L. Nelson from QuickBooks 2011 All-in-One For Dummies Accounting rests on a rather small set of fundamental assumptions and principles. People often refer to these fundamentals as generally accepted accounting principles. Understanding the principles gives context and makes accounting practices more understandable. It's no exaggeration to say that they permeate almost everything related to business accounting. Revenue principle

The revenue principle, also known as the realization principle, states that revenue is earned when the sale is made, which is typically when goods or services are provided. A key component of the revenue principle, when it comes to the sale of goods, is that revenue is earned when legal ownership of the goods passes from seller to buyer. Note that revenue isn't earned when you collect cash for something. Expense principle

The expense principle states that an expense occurs when the business uses goods or receives services. In other words, the expense principle is the flip side of the revenue principle. As is the case with the revenue principle, if you receive some goods, simply receiving the goods means that you've incurred the expense of the goods. Similarly, if you received some service, you have incurred the expense. It doesn't matter that it takes a few days or a few weeks to get the bill. You incur an expense when goods or services are received. Matching principle

The matching principle is related to the revenue and the expense principles. The matching principle states that when you recognize revenue, you should match related expenses with the revenue. The best example of the matching principle concerns the case of businesses that resell inventory. for example, if you own a hot dog stand, you should count the expense of a hot dog and the expense of a bun on the day you sell that hot dog and that bun. Don't count the expense when you buy the buns and the dogs. Count the...
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