A Guide to Basic Accounting Principles

1. A Guide to Basic Accounting Principles Have you ever wondered what goes on behind the scenes when it comes to accounting in Australia? Whether you are just starting your own venture or trying to wrap your head around the financial side of your business, understanding basic accounting principles is essential. These basic principles serve as the foundation for your business, providing the framework for accurate financial reporting, well-informed decision-making, and the overall success of your business. Get ready to unravel the mysteries of accounting in Sydney as we explore how these principles shape financial reporting, decision-making, and overall business success. What are Accounting Principles? Accounting principles are the procedures an accountant follows when compiling financial statements for a publicly listed company. The Australian Accounting Standards Board developed their own set of accounting standards based on these concepts. A company must follow the accounting laws that apply to its sector for a variety of reasons, including external audits.

2. The 12 basic accounting principles you should know: ● Accrual Principle The accrual basis of accounting is based on the idea that companies should record all transactions in the periods in which they occur rather than when cash flows are connected with them. Imagine you run a small café and have just supplied a large catering order for an upcoming event. According to the accrual principle, even if you have not received the payment yet, you should record the revenue as soon as you fulfil the order. As a result, you gain a more accurate representation of your business's financial health and make informed decisions. ● Conservatism Principle Accounting for start-ups is all about being prudent and cautious. The conservatism principle advises accountants to err on the side of caution when reporting financial information. Let's say you are unsure if you will actually get paid by one of your customers. Instead of waiting for them to bail on you completely, it is smarter to recognise the potential loss immediately. It is like assuming the worst-case scenario to protect yourself. On the other hand, you cannot count your chickens until they hatch. So, potential gains should only be recognised when they are realised. This principle ensures that financial reporting takes a realistic and conservative approach, reflecting potential losses and mitigating any overstatement of gains. ● Consistency Principle In the world of accounting in Sydney, consistency is key. The consistency principle requires businesses to consistently use the same accounting methods, policies, and procedures from one period to another. This way, you enhance the comparability of financial information over time. This reliability allows stakeholders, such as investors or lenders, to make meaningful comparisons and informed decisions based on reliable and consistent data. ● Topical Cost Principle When recording your restaurant's assets, for example, such as furniture or equipment, you do not consider their current market value. Instead, you follow the cost principle, which states that assets should be recorded at their historical cost—the original purchase price. Market fluctuations might influence the value of an asset, but the cost principle provides a reliable and conservative basis for recording transactions. Also, by sticking to the historical cost, you maintain a transparent and consistent representation of your business's financial position.

3. ● Economic Entity Principle As a small business owner, keeping your personal and business finances separate is crucial. The economic entity principle emphasises this separation. It means you should account for your business transactions separately from your personal transactions. This principle enhances transparency and allows for an accurate assessment of your business's financial performance. Also, you can clearly distinguish between personal expenses and business expenses. ● Full Disclosure Principle The full disclosure principle highlights the importance of providing all necessary information in your financial statements. As per Australian accounting standards, you must disclose relevant details, including potential risks, significant accounting policies, and contingent liabilities. By offering this complete picture, you empower stakeholders to make well-informed decisions. ● Going Concern Principle When you are putting together your financial statements, you assume that your business will keep running smoothly unless you have strong evidence to suggest otherwise. This assumption is called the ‘going concern principle.’ It lets you present your finances with the belief that your business will meet its commitments and keep operating. This principle gives stakeholders, like investors and lenders, the peace of mind that your business has a bright future. It shows them that you are confident about the long-term success of your company. So, when you are working on your financial statements, keep this principle in mind and show everyone that your business is here to stay! ● Matching Principle According to this principle, expenses should be recognised in the same period as the related revenues. Let's say you offer catering services at your café. If you cater an event in July, the expenses associated with that event, such as purchasing ingredients and paying staff, should also be recorded in July.

4. The matching principle accurately represents your business's profitability during a specific period by aligning revenues and expenses. ● Monetary Unit Principle As an Australian business, it is only natural that you measure and record financial transactions in a common currency—usually the Australian dollar. This principle, known as the monetary unit principle, ensures consistency and comparability of financial information. It allows for meaningful analysis and decision-making, as stakeholders can easily compare financial data across different businesses and periods. ● Reliability Principle Reliability is the gold standard in accounting for start-ups in Sydney. It requires your financial information to be accurate, verifiable, and free from bias. To ensure reliability, you must maintain proper documentation, adhere to accounting standards, and employ sound internal controls. You build trust with your stakeholders—investors, lenders, and even your customers by providing reliable financial information. ● Revenue Recognition Principle According to this principle, revenue should be recognised when it is earned, and you have a reasonable expectation of receiving payment. For example, you run an online store. A customer places an order and selects cash on delivery payment method. You ship the products, and that is when you acknowledge the revenue, even if the customer hasn't paid yet. This principle ensures that revenue is recorded in the appropriate accounting period, accurately representing your business's financial performance. ● Time Period principle The time period principle divides your financial activities into distinct periods for reporting purposes—usually quarterly, monthly, or annually. This division enables stakeholders to evaluate your business's financial performance over specific timeframes and make informed decisions based on periodic reports. Moreover, you can identify trends, track your progress, and address any improvement areas. The Bottom Line! You have now gained a basic understanding of the basic accounting principles! Remember, accounting principles provide a solid decision-making foundation and foster stakeholder trust. However, following these principles above all business work can be a challenge when you tack it onto all the other work-related responsibilities you have not to mention your personal life, If this is the case with you, use the help of a professional for all of your accounting needs in Sydney. And let them handle it!

5. Contact Us Business Name: Hatch Accountants Address: 285A Crown St, Surry Hills, NSW, 2010, Australia Phone: 0402 443 295 Email id: info@hatch.accountants Website: https://hatch.accountants/