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The Fundamental Principles of Accounting

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  • 0:05 What Are the Principles?
  • 3:21 Why They Are Important
  • 4:08 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

Accounting is an art, but just as with any form of art, you need the right tools to make your masterpiece. For accounting, those tools are the seven major accounting principles. In this lesson, you will learn what those principles are and what they are used for.

What Are the Principles?

Have you ever wanted to be an accounting strongman? I know. You probably think that's impossible. I am here to tell you that it is possible! You can achieve your dreams. You can become the envy of all those around you. All you have to do is follow a few simple accounting principles, which are the guidelines that must be followed when reporting financial data, and you can be just like me, Mr. Accounting 2013.

Are you ready to sit back and learn exactly what you have to do to become like me? Let's jump right in and start at the top.

First and foremost, you have to be able to practice objectivity. What's objectivity, you wonder? In accounting, objectivity is having the ability to rely on documented information to record financial information. This makes you believe what you're saying when you look at the numbers in accounting. You have to believe to be a part of this whole thing.

The next thing that you have to do is to know how to be a part of an arm's length transaction. An arm's length transaction is one where the people involved in the transaction are not personally related. This makes it fair and just so that each party is looking out for their self and isn't being shoved around by the other person.

The third thing that you're going to have to accomplish is to understand cost. Cost, in accounting, is the amount of cash given up to acquire a specific item. For me, it cost an awful lot of gym fees to get these muscles that I have!

The next major concept that you have to tackle is called going-concern. Going-concern means that you believe that a company is going to keep on keeping on far into the future. It makes you have faith in the financial statements that they present to you, and that faith builds up the core muscles in accounting.

You also have to get a grasp of the monetary measurement concept. This concept makes you see that every single accounting action deals with money. After all, isn't that what accounting is all about? It's all about the Benjamins!

Still looking at those Benjamins, the next part of transforming yourself into Mr. Accounting requires that you know how and when to recognize revenue. Because of that, we have the revenue recognition principle to assist you. The revenue recognition principle states that revenue is realized when it is earned, regardless of when it is received.

That one kind of gets you, doesn't it? I think I will explain it a little more. In accounting, you can choose to use cash basis accounting or accrual accounting. Either of these types is fine, as long as you use it consistently.

In cash basis accounting, revenue is recognized when cash is placed in the hand of the seller or supplier, and expenses are realized when they are actually paid. In accrual basis accounting, which is where the revenue recognition principle comes into play, revenue is recognized when it is earned, regardless of when it is received, and expenses are recognized when a bill comes in, regardless of when it is paid.

The last tool that I need to give you to help you become an accounting giant is the separate entity principle. The separate entity principle states that no matter what you do as a business owner, you must keep your personal dealings completely separate from your company dealings. You can't mix the two at all.

Why They Are Important?

Now you know the seven secrets to becoming Mr. Accounting. I can tell you from experience that if you follow all of these principles, then you'll succeed in being part of the accounting world. They're here to guide you in your decisions and to help you along the way.

You can't do it alone. This is the experience of a lifetime. Don't let it get away from you. Jump up now and say, 'I want to do it! I want to follow the seven principles that make accounting great. I want to learn how to transform myself into an accounting role model.'

I can tell you that if you don't follow the seven guiding principles of accounting, you won't produce accurate financial statements, and financial statement users won't be able to rely on them. This is not what you do, not if you want to be a lean, mean, accounting machine!

Lesson Summary

Okay, people, I am running out of time. I have a few minutes left to remind you how to become an accounting powerhouse by following seven accounting principles. Remember, the accounting principles are the rules and guidelines that companies must follow when reporting financial data.

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