Want to be an Accountant in Dubai? You must know… The Basics of Accounting Principles - Part 3

In the last two post, we tackled the first seven basic accounting principles; economic entity assumption, monetary unit assumption, time period assumption, cost principle, full disclosure, going concern and matching principle. For this post we will talk about the last three basic principles. Let’s get started.

Revenue Recognition Principle

The revenue recognition principle is a cornerstone of accrual accounting together with matching principle. They determine the accounting period in which revenues and expenses are recognized.

Under the accrual basis, revenues are recognized as soon as a product has been sold or a service has been performed. With this, a company could earn $10,000of revenue in its first month of operation but receive $0 in actual cash that same period.

It states that you should only record revenue when an entity has substantially completed a revenue generation process.

Materiality

In accounting, materiality allows you to violate another accounting principle if the amount is so small that the reader of the financial statements will not be misled. Professional judgment is needed to decide whether an amount is insignificant or immaterial.

A good example o this concept or principle is the immediate expensing of a $12 wastebasket that has a useful life of 10 years. The matching principle directs you to record the wastebasket as an asset and hen depreciate its cost over its useful life of 10 years.

The materiality principle simply allows you to expense the entire $12 in the year it is acquired instead of recording depreciation expense of $1 per year for 10 years. Reason for this is that no creditor, investor or other interested party would be misled by not depreciating the waste basket over 10-year period.

Determining what is a material or significant amount can require professional judgment

Conservatism

It is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome. If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the account to choose the alternative that will result in less net income and less asset amount. This principle helps the accountant to break a tie. It does not direct the accountants to be conservative. They are expected to be unbiased and objective.

This also led the accountants to anticipate or disclose losses but not similar action for gains. Potential losses from lawsuits will be reported on financial statements but potential gains will not be noted. Accountants may also write inventory down to an amount that is lower than the original cost, but will not write inventory up to an amount higher than the original cost.

That’s it! These are the 10 basic accounting principles that will help you land a job in the field of accounting. I hope that this series of post help you in your chosen career! Thanks!

Accountants in UAE? Click here http://embassy-fs.com/

• Read Part 1 here
• Read Part 2 here

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Want to be an Accountant in Dubai? You must know… The Basics of Accounting Principles - Part 2

Part Time Accountants in Dubai

In the previous blog we tackle the first part of the basics of Accounting, economic entity assumption, monetary unit assumption, time period assumption and cost principle. Today we will talk about the next three principles – full disclosure, going concern and matching principle.

Full Disclosure Principle

This principle states that you should, as an accountant, must include all information in an entity’s financial statements that would affect the reader’s understanding on those statements. Important information should be disclosed within the statement or in the notes section of the statement.

In business terms, this principle requires the company to provide the necessary information so that people who are accustomed to reading financial information can make informed decisions done by the company.

Companies usually list its significant accounting principles as the first note of their financial statements.

The required disclosure can be found in the following.

• Financial statements
• Management discussions and analysis
• Quarterly earning reports, press releases and other means of communications

[See Filipino Accountants in Dubai]

Going Concern Principle

This principle is the assumption that an entity will remain in business in the future. It will continue to exist long enough to carry out its objectives and commitments. This simply means that the entity will not be forced to stop operations and liquidate its assets in the near term at what may be very low sale prices.

It is a required responsibility of the accountant to disclose a statement if he believes that the company’s financial situation will not be able to make the company to continue on. By making this assumption, the accountant is justified in deferring the recognition of certain expense until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible.

[See Dubai Accountant – Duties and Responsibilities]

Matching Principle

This states that all expenses must be matched in the same accounting period. This requires companies to use accrual basis of accounting. The matching principle requires that expenses be matched with revenues.

Ideally, the matching is based on a cause and effect relationship. If no cause and effect relationship exists, accountants will show an expense in the accounting period when a cost is used up or being expired. If a cost cannot be linked to revenues, the expenses must be recorded immediately.

Just for an example:

Sales commission expense should be reported in the period when the sales were made. Wages to employees are reported as an expense in the week when the employees worked and not in the week when the employees are paid.

If the company agrees to give its employees 1% of its 2010 revenues as a bonus on January of 2011, the company should report the bonus as an expense in 2011 and the amount unpaid at the December 31, 2011 as a liability.

The future economic benefits of things such as advertisements cannot be measured; the accountant must charge the ad amount to expense in the period when the ad was run.


See Part 3 here.
Read Part 1 here.

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You may read also:

• Accountants in Dubai: 6 Types of Accounting Degrees
• Top 4 skills you need to be a successful accountant
• Basic Theories About Accounting

Want to be an Accountant in Dubai? You must know…The Basics of Accounting Principles - Part 1

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Field of accounting has general rules and concepts. If you want to be employed in an Accounting Firm or just want to be a part time accountant in Dubai like in Embassy FS, you must learn and know what the principles of Accounting are.

Basically these are general rules which are referred to as the “basic accounting principles and guidelines” that are more detailed, complicated and legalistic accounting rules.

I have divided the principles on three parts so that we may tackle each one carefully. The following is a list of the first 4 main accounting principles and guidelines.

1. Economic Entity Assumption

This is the one of the assumptions made in generally accepted accounting principles. It states that the record activities of a business entity will be kept separate from the record activities of its owner and any other business entities. This simply means that you must maintain separate accounting records for each entity, and not intermix with them the assets and liabilities of its owners. Also you must associate every business transactions with an entity.

Any organization can be an economic entity. Examples may include but not limited to companies, municipalities, institutions and hospitals.

2. Monetary Unit Assumption

The monetary unit assumption states that the dollar (or the currency you’re using) is stable in the long run. It does not lose its purchasing power and does not change over time.

This assumption allows the accountant to add the cost of a parcel of land purchased in 2012 to the cost of the land in 1952. For example, if a three-acre parcel cost the company $30,000 in 1950 and in 2012 a three-acre parcel adjacent to the original parcel is purchased for a cost of $900,000, the accountant will add the $900,000 to the land account and will report the land’s account balance of $930,000 on the company’s balance sheet. As a result, the accountants ignore the effect of inflation on record amounts.

To make things simple, monetary unit assumption means that the business should have one money unit to record its transactions, in our example, it is US dollars.

3. Time Period Assumption

This principle is the concept that a business should report the financial results over a standard time period, usually monthly, quarterly and annually. The shorter the time period, accountants likely need more effort to estimate amounts relevant to the given period.

It is imperative that the time period or time interval be show in the heading of each income statement, cash flow and stockholders’ equity. For example, an income statement may cover the “Eight months ended August 31”. However, the balance sheet can be dated as of specific date rather than a range of dates, for example, we can write “as of August 31” in the header.

4. Cost Principle

It is one of the basic underlying guidelines in accounting, also known as the historical cost principle. It requires that assets will be recorded at the cash amount at the time that the asset is acquired.

Because of this accounting principle asset amounts are not adjusted upward for inflation. As a general rule, asset amounts are not adjusted to reflect any type of increase in value. An asset amount does not reflect the amount of money a company would receive if it were to sell the asset at current market value.

The cost principle also means that valuable brand names and logos will not be reported as assets on the balance sheet. This could result in company’s most valuable assets not being included in the company’s asset amounts.

Basically it is the accounting guideline that requires amounts in the accounts and on financial statements to be the actual cost rather than the current value.


Click here for the 2nd Part

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