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

Image Source: http://www.generalaccounting.com/

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

http://embassy-fs.com/

More on Accounting:
Dubai Accountant – Duties and Responsibilities
Top 4 skills you need to be a successful accountant
Basic Theories About Accounting
Beginning In Accounts And Accounting Books