Principles of Bookkeeping

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Tally Solutions | Nov-28-2019

In simple words, bookkeeping refers to recording, classifying and summarizing business transactions systematically so that the businesses are able to know the vital information such as profit or loss, cash position, financial health etc.  Just link any other thing, there are principles of bookkeeping which you need to follow all the time. 

Principles of Bookkeeping

The primary principle of bookkeeping is to record on a day-to-day basis the financial transactions and information pertaining to a business. The bookkeeping principles ensure that the individual financial transactions are up to date and comprehensive. Also, to provide information from which accounts are to be prepared.

Alright! Let's take a look at different  principles of bookkeeping

Revenue Principle

The revenue principle defines a point in time when bookkeepers may record a transaction as 'revenue' in the books. It states that revenue for the business is earned and recorded at the point of sale.

This principle states that the revenue occurs at the time when the buyer takes legal possession of the item sold or the service is performed. This implies that revenue is not necessarily at the time when cash for the transaction is accepted by the seller. This concept is also called a revenue recognition principle.

Expense Principle

The expense principle defines a point in time at which the bookkeeper may log a transaction as an expense in the books. It states that an expense occurs at the time when the business accepts goods or services from another entity.

The logic behind this principle is that the expenses occur when the goods are received or the service is performed, regardless of when the business is billed or pays for the transaction.

Matching Principle

The matching principle propounds that, when you record revenue, you should record all related expenses at the same time. Thus, you charge inventory to the cost of goods sold at the same time that you record revenue from the sale of those inventory items.

Cost Principle

This principle states that you should use the historical cost of an item in the books, not the resell cost. Let’s say if a business owns the property, such as real estate or vehicles, then those assets should be listed as the historical costs of the property and not at the current fair market value of the property.

Objectivity Principle

This principle states that you should use only factual, verifiable data in the books, never a subjective measurement of values. Even if the subjective data seems better than the verifiable data, the verifiable data should always be used.

In inclusion to these basic principles, the accounting world operates under a set of assumptions, or things that accountants can assume to always be true.

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