EntrePinoys Atbp.

Accounting is important to you and your business for many reasons. To begin with, when you have an accounting system, you will know how your business has performed financially during a particular period, and you can also evaluate how you had managed your cash flows and other assets. You can do this by reading the different financial reports that you can generate from your accounting records, such as your balance sheet, income statement, and cash flow. A qualified accountant in your company can help you interpret the financial figures in the report correctly for evaluation and decision-making purposes.

Also, if you are planning to expand and would like to raise money by taking in new investors, you need to consult your accounting records regarding the net worth of your business. Net worth is the residual capital left when you deduct all of your liabilities from your assets. Now, when you have a clear idea of how much your net worth is, you can use that as a starting point for valuing your business. The valuation that you arrive at will then become the basis of the selling price that you will offer to your prospective investors.

The First 5 Basic Accounting Concepts

1. Business Entity – This is the most basic assumption in accounting. Thus, when you are in business, you don’t ask your company to pay for your personal credit cards or for your expenses at home. This is because you are your own entity–an entity that is separate from your business.

2. Going Concern – Because the company is separate from you, it is assumed that your business will continue to operate indefinitely even if you are no longer its owner. Your business can be transferred to anyone in the future if you decide to sell your ownership, and it shall continue to exist regardless of your personal situation.

3. Historical Cost Principle – The principle of historical cost simply states that all assets and services you acquired should be recorded at their actual cost at the time when the transaction occurred.

4. Revenue Principle – The revenue principle requires you to record sales when it is fulfilled and earned, not when cash is collected. For example, if you sold merchandise to your client on credit and the latter promises to pay you next month, how are you going to record this transaction? Under the revenue principle, you should record sales during the month you sold the merchandise regardless of whether you have received cash or not.

5. Matching Principle – Assume that you are planning to buy a franchise to open a restaurant. You paid P1 million for the franchise fee and spent another P10 million for the construction. Now the question is:  Do you record these expenditures as expenses during the month even though you don’t have any sales yet?

The Other 6

1. The Accrual Basis of Accounting
2. Materiality Principle
3. Disclosure Principle
4. Objectivity Principle
5. Consistency Principle
6. Conservatism Principle

Table of Contents

• Why even small businesses need accounting
• Why accounting is crucial to your business
• The first 5 basic accounting concepts
• The other 6 basic accounting concepts
• Setting up an accounting system
• The various financial reports
• Financial analysis
• Budgeting
• Cash flow management
• Managing receivables
• Managing inventory
• Managing payables

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source: www.entrepreneur.com.ph

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