Monday, 19 Dec 2022
Businesses need bookkeeping to understand their current performance and future viability. As soon as an entity in Melbourne starts earning, it must maintain accurate records for every transaction that aid in making strategic financial decisions. Whether setting up the budget or planning taxes, the assistance of a bookkeeper plays a pivotal role in managing the cash flow.
Several small business owners assume the responsibility of bookkeeping to reduce the expense of hiring a professional bookkeeper Melbourne. However, when the business starts growing, it becomes impossible to organise and manage finances for future success.
Whether the entrepreneur shoulders the responsibility or outsources it, understanding its basic principles is vital for the business’s smooth functioning and effective performance. So, here is everything you need to know about basic bookkeeping principles.
The revenue recognition principle states that a business should not recognise revenue until it has generated considerable capital over a given period. So, the bookkeeper does not record revenue until the buyer consumes the product or utilises the service provided by the business in Melbourne. According to this principle, revenue is not recorded when the product is bought by the buyer.
In accrual accounting, revenue is recorded at the time of sale of the product even if the money is not received. Thus, revenue is added to the books even if the money is not received for a few months after the sale. Conversely, during the cash basis of accounting, the bookkeeper records the revenue when the business receives the money from the sale in Melbourne.
The value of every product changes with time due to several internal and external factors. However, the cost principle suggests recording the historical cost of the goods in the books rather than their resell costs. It is also called the purchase price accounting theory. It has become unpopular in the current bookkeeping system because bookkeepers prefer to calculate the fair market value of assets and liabilities.
For example, if a business in Melbourne purchased equipment whose cost depreciated over the years, the asset will still be recorded at its purchase price as per the cost principle. The bookkeeper will mention the changes in its value in the depreciation entries. This method helps record the assets’ acquisition costs while noting the depreciation in their value.
The matching principle recommends recording revenue along with all the related expenses. It implies that sales and the expenses incurred to achieve those sales should be put in the books simultaneously.
It helps maintain accurate records when you are following the accrual basis of accounting. The expenses to income ratio should be 1:1 to keep the cash flow positive. However, many businesses in Melbourne use the cash basis of accounting and record expenses separately at the time of spending money. Thus, this principle does not apply to them.
The full disclosure principle states that the financial statements must include all the information that was needed to create the report. It is required to help the reader understand the statement completely and figure out the financial health of the company.
For example, adding the accounting policies followed by the business in the notes of the financial statement is a part of the full disclosure principle that maintains transparency. Stakeholders and investors use the information to get all the details related to the inflow and outflow of capital from the business in Melbourne.
The information is usually added in the footnotes of the statements to include all the factual data that the moneylender might need to gauge the company’s financial well-being.
According to the objectivity principle, bookkeepers in Melbourne should use factual and verified data while generating financial reports and making calculations. The focus should be on maintaining objectivity in the books without using assumptions or subjective figures resulting from personal biases. It helps to avoid bookkeeping errors.
Thus, every record should have supportive information in the form of bills and invoices to provide evidence. The objectivity principle should be used by bookkeepers who have been associated with the same business for a long time and can become subjective in their calculations because of their emotional connection with the company.
The going concern principle states that the business in Melbourne should perform its operations without assigning an end date. It suggests that the company will continue to run for many years to come. Thus, the bookkeeper can postpone calculating specific expenses, such as depreciation, to a later date.
The principle works on the basis that the business is performing well and will continue to flourish for several years without any risk of shutting down. However, if the bookkeeper notices that the business is unstable and may not stay afloat, they need to avoid using this principle.
Bookkeepers have to organise the books and maintain the records of every transaction to generate accurate reports. The principles mentioned above help them maintain objectivity, comprehensibility and accuracy of the books. Entrepreneurs in Melbourne must know these basic principles to improve their financial literacy.
