How the Accounting Principles and Guidelines affect the Financial Statements

How the Accounting Principles and Guidelines affect the Financial Statements

The basic accounting principles directly impact the way you should prepare and interpret your business financial statements. In this article, we will focus on how the accounting principles impact the balance sheet, income statement, and the notes included in the financial statements.

Balance sheet

All the assets that you list in your balance sheet must have cost that can be measured and each amount represents the original cost of the specific asset. This is in accordance with the monetary concept in accounting.

Also, to ensure that your business balance sheet conforms to the economic entity assumption of accounting, only the liabilities, assets, and owners’ equity are included in the balance sheet. According to the economic entity principle, every business is a separate entity from its owner or owners and is regarded as an accounting business or entity. Therefore, in the preparation and interpretation of the balance sheet, you can’t include your personal finances. Instead, you must treat your business as a separate entity.

The monetary unit assumption and the cost principle prevent various valuable assets from featuring in the balance sheet. The cost principle states that all business transactions are recorded at the cost at the time it took place. For example, corporations that deal in consumer goods with famous trademarks, high brand names, and logos aren’t shown on the balance sheet because they weren’t purchased. For Instance, Coca-Cola’s logo isn’t shown in the company’s assets because it wasn’t purchased and so its cost can’t be determined, yet it is the most valuable asset for such an international corporation.

Besides, a company that has a competent management team and excellent reputation can’t include such assets in its balance sheet, yet, they are very crucial to its operations. This is because such assets can’t be measured in monetary terms.

Income Statement

An income statement reveals the revenues of business for a stated period such as a quarter, a year, and more.

Revenue is the fees that your business has received for the specified period. Note that this revenue should be recognized in the income statement when it was earned rather than when your business received the cash. Also, you should match such revenue with the related expense in the same accounting period. This is in accordance with the matching principle. Using our accounting services in Singapore, you will be more than comfortable that this will no longer worry you.

The notes included in the financial statements

According to the full disclosure principle, a company’s financial statements must include the disclosure notes. Such notes help the financial statement users to understand the information included in the financial statement. Note that all notes to the financial statements are perceived as an integral part of those documents and should never be omitted.