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Accounting Principles for Normal People

By Edited Dec 25, 2013 0 0

Well, I have been taking some accounting classes lately and there are some things I thought might be good to share! There are some stuff you might come across in case you ever need to dabble in some accounting, perhaps if you need to make sense of some numbers. But of course for the serious accounting work or for auditing you would need to call up your friendly neighborhood CPA accountant or respected and qualified auditors instead of relying on rules of thumbs. The following is written by a lay person in his limited understanding of accounting!

Here are some of the things that have been bandied around, sometimes even flying over our heads:

Matching Principle

This is an interesting principle in accounting as it was one of the ideas that made people move away from more classic cash based accounting. If you don't know what it means, you will soon have a rough idea. Cash based accounting is like the times when you were living off from paycheck to paycheck like the time you had to eat bread for a week just because there wasn't any greens left in your wallet and you had to wait desperately for the month's check. All your financial planning revolves around cash based transactions. In cash based accounting, transactions are only recorded when money leaves or enters your wallet. Matching principle will result in accrual accounting, where you try to attribute benefits gain to the expenses meted out in acquiring them so that you have a better picture of what works and what doesn't. This allows you to pinpoint what is good and should be maintained and what is bad and should be improved.

Time Period Principle

This is really more of an assumption than a principle, and it basically tries to rationalize timely reports of accounts. This can be done in intervals of three months or half a year or whatever the regulatory authorities want it to be and allow you to have it be but of course in a real life scenario this interval will come on the day your income tax filings are due and you rush to get all your things in order. If you do it every few months or so, in real life you probably find yourself having to estimate things like cost of petrol as well as food over that particular time period. Similar things takes place in accounts except that the stuff that goes in might be things like company tax bills that have been carried over or impending litigation costs and things like that.

Revenue Recognition Principle

Again under accrual accounting, this is a similar idea in that you recognize stuff going in and out of your pocket even if there has been no cash, so long as you are reasonably sure that the payment either to you or from you will take place. It does not matter whether it is taking place on credit where it is paid up later or immediately say in cash. So a $12,000 contract for a year would amount to $1000 recorded each month. On a personal level this might be a good way to plan for buying big ticket items like a house or a car.

And that is it for now, but things do change and the information above might cease to be accurate as time passes. It is meant as a cheerful lay person's viewpoint and of course limited understanding of accounting and if you need something more serious then you would need to go find the appropriate professional to help you with your needs and understanding as well as any preparation of documents and things like that!

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