An Overview of Contracts and Why They are Important to Business and Society
Contracts govern all transactions whether they are between firms or between firms and private individuals. Indeed, in most of the developed world, any transaction or commercial exchange is usually not undertaken without a contract. This trend is also catching up in the developing world where contracts are increasingly becoming the norm. The importance of contracts…
Cash vs. Accrual Basis of Accounting
Cash Basis of Accounting Cash Basis of Accounting uses receipts and payments of cash to record incomes and expenses. Therefore, under the cash basis of accounting, if a corporation makes salary payments of January, 3 months later in April, it will be considered as expenses in the month of April, since that is when the…
Why College Education Should Not Be Free?
President Ronald Raegan had once famously said that “Big government is not the solution to the problem. In fact, big government is the problem?” This line is remarkably applicable to the current situation surrounding the student debt crisis. The student debt crisis in the United States has reached epic proportions. The total loans outstanding are…
Following are the basic fundamental principles of Accounting:
Accounting needs all values to be recorded in terms of a single monetary unit. It cannot account for goods like the barter system.
Assigning values to goods and items therefore becomes a problem since it is subjective. However, accounting has prescribed rules to deal with the same.
A company is said to have an eternal existence. Once it is formed, the only way to end it is by dissolution. It does not die a natural death like humans do. Hence, accountants assume the going concern principle.
This principle implies that the firm will continue to do its business as usual till the end of the next accounting period and that there is no information to the contrary.
Because of the going concern principle, organizations can function on credit, account for accounts receivables and payables which intend to receive or pay in the future and charge depreciation assuming that the machine will be used for many years.
In case, the management has information that the operations will be suspended in the near future, normal accounting ceases. A special type of accounting meant for dissolution purpose is used.
Accountants are said to be very conservative by nature. They want to hope for the best and be prepared for the worst. This is displayed in the rules that they have created for their profession.
One of the central tenets of accounting is the principle of conservatism.
According to this principle, when there is doubt about the amount of expected inflows and outflows, the organization must state the lowest possible revenue and the highest possible costs.
This can be seen in the fact that accountants value inventory at lower of cost or market price. However, such conservatism helps the company be prepared for any forthcoming financial crises.
Closely related to the principle of conservatism is the cost principle. The cost principle advocates that companies should list everything on the financial statements at the cost price.
Usually assets like land and building, gold, etc appreciate. However, the accountants will not allow this appreciation to be reflected on the financial statements of the company till it is realized.
Accountants believe that the market value of anything is just an opinion. Accountants cannot account on the basis of opinions because there are many of them.
The selling price of something is a fact since someone has paid for it and the same can be verified. Hence accounting works on cost principle and therefore on facts.
Your email address will not be published. Required fields are marked *
An Overview of Contracts and Why They are Important to Business and Society
April 3, 2025
