If the consistency principle is not followed, the company will jump around here and there, and financial reporting Financial Reporting Financial reporting is a systematic process of recording and representing a company’s financial data. If a company follows an accounting principle, it should keep following the same principle until a better one is found. As per the accrual principle, the sales should be recorded during the period, not when the money would be collected. For example, let’s say that a company has sold products on credit. read more in the same period it happens, not when the cash flow was earned. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction.
The company should record accounting transactions Accounting Transactions Accounting Transactions are business activities which have a direct monetary effect on the finances of a Company. Source: Accounting Principles () #1 – Accrual principle:
This is to show the true picture of the business financial performance.You are free to use this image on your website, templates, etc, Please provide us with an attribution link How to Provide Attribution? Article Link to be Hyperlinked Expense should be recognized and recorded at the time it is incurred, regardless of the time that cash is paid. This principle requires that revenue should be recorded in the period it is earned, regardless of the time the cash is received. It also states that recording should be performed with independence, that’s free from bias and prejudice. This principle states that the recorded amount should have some form of impartial supporting evidence or documentation. This principle states that errors or mistakes in accounting procedures, that which involves immaterial or small amount, may not need attention or correction. This principle ensures similar and consistent accounting procedures is used by the business, year after year, unless change is necessary.Ĭonsistency allows reliable comparison of the financial information between two accounting periods.īusiness transactions that will affect the decision of a user are considered important or material, thus, must be reported properly. This principle states that given two options in the amount of business transactions, the amount recorded should be the lower rather than the higher value. For annual accounting period, it may follow a Calendar or Fiscal Year. This principle entails a business to complete the whole accounting process over a specific operating time period.Īccounting period may be monthly, quarterly or annually. This principle requires that revenue recorded, in a given accounting period, should have an equivalent expense recorded, in order to show the true profit of the business.
Exception to the rule is when the business is in the process of closure and liquidation. Thus, any non-financial or non-monetary information that cannot be measured in a monetary unit are not recorded in the accounting books, but instead, a memorandum will be used.Īll business resources acquired should be valued and recorded based on the actual cash equivalent or original cost of acquisition, not the prevailing market value or future value. The business financial transactions recorded and reported should be in monetary unit, such as US Dollar, Canadian Dollar, Euro, etc. And that assets are not intended to be sold immediately or liquidated. Assets are assumed to be held and used for an indefinite period of time or during its estimated useful life. In this basis, generally, assets are recorded based on their original cost and not on market value. It assumes that an entity will continue to operate indefinitely. Any personal transactions of its owner should not be recorded in the business accounting book unless the owner’s personal transaction involves adding and/or withdrawing resources from the business. A business is considered a separate entity from the owner(s) and should be treated separately.