One of the important aspect of writing and presenting the financial statements is that it should follow basic accounting principles. Different stakeholders of the company expect full and clear disclosure of information, so that they can take right decisions. There are 5 basic principles which are key principles in writing and presenting the financial statements.
1. Revenue Recognition Principle
When you are recording information about your business, you need to consider the revenue recognition principle. This is the period of time where revenues are recognized through the income statement of your company. In order for your revenues to be recognized in the period that the services were provided if you are on the accrual basis, If you are on the cash basis then, the revenues need to be recognized in the period the cash was received.
2. Cost Principle
Recording your assets when you purchase a product or service helps keep your business’s expenses orderly. It’s important to record the acquisition price of anything you spend money on and properly record depreciation for those assets.
3. Matching Principle
Expenses should be matched to the revenues recognized in the same accounting period and be recorded in the period the expense was incurred. If there is a period of time where revenue was recognized on sold products or services, then the cost of those things should also be recognized..
4. Full Disclosure Principle
The information on financial statements should be complete so that nothing is misleading. With this intention, important partners or clients will be aware of relevant information concerning your company.
5. Objectivity Principle
The accounting data should consistently stay accurate and be free of personal opinions. Make sure the data is also supported by evidence that can include vouchers, receipts, and invoices. Having an objective viewpoint, in this case, helps rely on financial results. For example, your viewpoint may not be objective if you once worked for the same company that you are now an auditor for because your relationship with this client might skew your work.