Understanding Accounting Principles for Small Business Owners (Infographic)

Understanding accounting principles can assist you in making more accurate projections about your company’s future based on past sales and cost trends. This will help you in making better financial and operational decisions in the long run.

As an entrepreneur, this will save you time and money, two of your most significant resources. Even if you use the best accounting software for small business, you need to have a basic awareness of these ideas.

Here are the five accounting principles that a small business owner must know.

#1 Accrual Principle

This is one of the most essential concepts that, in comparison to cash-basis statements, provides a considerably better picture of your company’s financial status. The Generally Accepted Accounting Principles (GAAP) require public companies to adopt accrual accounting.

#2 Matching Principle

Revenue and revenue-related expenses should be reported at the same time, according to this principle. The purpose is for you to be able to determine whether income and purchases have a cause-and-effect relationship.

#3 Economic Entity Principle

One of the most important concerns for small businesses is to keep company and personal assets separate. If you are a corporation or a limited liability organization, failure to adhere to this principle might make virtual bookkeeping much more difficult, as well as put you in legal concerns.

#4 Materiality Principle

This is a straightforward concept that argues that businesses should keep track of all financial transactions that may have a significant impact on business decisions. Even if only a few transactions are recorded as a result, this gives a comprehensive view of the company is better. In fact, using small business accounting software in recording small transactions would be a great help.

#5 Going Concern Principle

You should assume your company is in good financial form and will continue to function for the foreseeable future if you follow the “going concern” idea. This concept enables companies to defer the recording of certain expenses until later in the fiscal year.

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5 Accounting Principles Every Small Business Owner Should Know