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!

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• Read Part 1 here
• Read Part 2 here

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