Hello, readers! Welcome back to the Hoods Tax & Accounting blog! If this is your first time here, welcome! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting. Our blog is also dedicated to educating you about tax-advantaged savings accounts, tax provisions, programs, and more! We aim to provide you with the tools needed to meet your short and long-term goals. Our seasoned professionals are experts on the tax code, eligible deductions, and QuickBooks—all necessary fundamentals for saving you money! The Hoods Family has been around since 1988 and our comprehensive accounting and tax planning services are among the best in the Lowcountry. If you’re in need of tax preparation, accounting, QuickBooks training, or business consulting services, do not hesitate to schedule an initial consultation! As we approach the end of the year, tax season steadily approaches. We recommend preparing early to maximize your savings and refund. We do offer contactless services using a combination of over-the-phone consultations and digital drop-offs, for safety and convenience. You can read more about our hours and submit a request for a meeting using our website!
 
Our last series, Bookkeeping Basics, explained bookkeeping fundamentals in an easy-to-understand format. From understanding different kinds of accounts to the nature of double-entry, our series broke down bookkeeping into its requisite parts. What’s the difference between a debit and a credit? Does single or double-entry bookkeeping suit your business better? How do you prepare financial documents? What are the bookkeeping best practices which will take your business to the next level? The answers to these questions and more can be found in our previous posts. Bookkeeping is one of the most essential building blocks of any successful business and the precursor to accurate accounting. Therefore, we recommend giving this series a read before delving into our Accounting series. 
 
Now, in part one, we discussed why accounting is a primary function in the management of a business of any size. We detailed what exactly accountants are responsible for, as well as how they execute these responsibilities. Like bookkeeping, accounting is separated into distinct types. We provided an overview of the differences between these types of accounting and how to determine which type is suitable for your business. In addition to answering a few common questions about accounting, we shone a light on the benefits of hiring a professional accountant. In part two, we started parsing through the nitty-gritty details of accounting principles. Accounting principles are the general guidelines by which accountants perform their duties; and each principle is underpinned by a practicality. While the most commonly recognized accounting principle is the accrual principle, in our last article we covered the consistency principle, the full disclosure principle, the conservatism principle, and more. Today, we’ll continue our discussion on accounting principles and finish out this series by answering a couple of questions and providing a few best practices for accurate accounting. The aim of this series is to provide a solid foundation for understanding how accounting works and to stimulate an interest in further learning. If you haven’t already, make sure to give the first two parts of this series a read! Without further ado, let’s learn!
 
Accounting Principles
 
Who decides on accounting principles? The Financial Accounting Standards Board, otherwise known as the FASB, dictates the standard accounting principles used by accountants in the United States. These principles are called the “generally accepted accounting principles,” or GAAP. Accounting principles aren’t arbitrary, nor did they arise out of thin air. Rather, as the name suggests, these principles were previously followed by the general majority of accountants and, after a number of years, became a matter of practice. Now, all publicly traded companies must abide by the GAAP. For small businesses, however, most principles are not mandated. In fact, many accountants rely on their own training, experience, and the specific needs of the business they’re servicing to determine which accounting principles to apply. That said, as we established in the last part of this series, consistency is key. Accounting principles should be maintained over long periods to ensure the clearest picture of a company’s financial history can be obtained by looking at financial reports. 
 
The first principle we’ll discuss today is the materiality principle. This is quite a vague, hard-to-pin down concept, as its effect is based almost entirely on perception. Simply put, the materiality principle stipulates that any transaction which might alter the decisions of those interpreting financial statements must be recorded on said financial statements. Conversely, any transaction which is deemed inconsequential or “immaterial,” can be left off of financial statements, as long as this would not result in anyone being misled. Now, determining whether a transaction is material or immaterial is a subjective task, relying on the judgement of the accountant. Failing to record a significant, material transaction can have consequences. Therefore, the Securities and Exchange Commission provides a tentative definition for materiality: “an item representing at least 5% of total assets should be separately disclosed in the balance sheet.” Still, smaller transactions may still be considered significant. For example, if Company A failed to report a loss of $30, would this be considered misleading? Well, if this $30 loss resulted in their reported net profit actually being a net loss, then yes. Therefore, it’s not necessarily about the size of the transaction, but rather the weight of the transaction. If you’re abiding by the materiality principle, be sure to ask yourself: What impact does this transaction have on the overall positive or negative implications of the financial statement?
 
The second principle we’ll discuss is the monetary unit principle. This principle is based upon the assumption that business should record only those transactions linked to a set value of currency. For example, if Company B invested $5,000 into a new piece of equipment, this would be recorded as such. However, if Company B invested time and resources into improving an aspect of their business, this wouldn’t necessarily be recorded. The purpose of the monetary unit principle is to avoid overvaluing certain assets and liabilities. The monetary unit principle plays into a much larger principle—that of verifiability. To be verifiable, accounting results must be reproducible, meaning an outside accountant could derive the same results from using the same historical data. Speaking of historical data, this is the basis for the reliability principle, which states all recorded transactions should be capable of being proven. This is why accountants and bookkeepers alike are always encouraging you to keep receipts! The reliability principle dictates the practice of auditing. To successfully survive an audit, you must have evidence to support transactions. 
 
The revenue recognition principle is one of the most important principles, as a failure to accurately report revenue can land you and your business in hot water. This principle stipulates revenue must be recorded when it is “earned.” Now, this principle becomes complicated by factors such as a company’s size, location, and public or private status. However, in a broad sense, revenue is earned when a company has fulfilled its performance obligations. For example, if Company C has entered into an agreement with Company B to provide a service, the revenue from this agreement will only be earned when the service has been completed, not when the cash is exchanged. As you might’ve already noticed, this principle does not apply to those who practice cash-basis accounting. Financial institutions are releasing more and more regulations concerning revenue recognition in order to standardize the process and provide investors with greater transparency into a company's financial performance. 
 
Finally, there’s the time period principle, which is based upon the assumption that a business should report their financial transactions over a set period of time (i.e. fiscal quarter, fiscal year, etc.). Reporting in this way is essential for trend analysis. 
 
Questions & Best Practices
 
When were accounting principles first standardized? In the 15th century, with the advent of the T-ledger, double-entry bookkeeping became the first standardized accounting principle. More recently, the American Institute of Certified Public Accountants made efforts to standardize accounting in the U.S. Should you try to follow as many accounting principles as possible? No, this isn’t recommended, especially since a few accounting principles are directly opposed to one another. One of the biggest critiques of the GAAP is that it is not mandated, but this gives companies quite a bit of leeway to decide for themselves the best accounting methods. We recommend consulting with professional accountants and asking for their opinion on which accounting principles are applicable for your business. 
 
Like bookkeeping, it’s important to track all expenses and keep evidence of every transaction. If you’re performing your accounting yourself, you’ll need to regularly set aside time to perform necessary duties. Professional accountants make an effort to automate accounting functions where possible. Always keep business finances separate from personal finances, for tax purposes and overall clarity. As well, make sure to keep backups of all financial records. 
 
 
As you can see, accounting is a complex art, dictated by its own set of standards. A professional accountant will be able to navigate these choppy waters with ease and provide you with the results you desire. Consider Hoods for your accounting needs! We offer bookkeeping, accounting, and business consulting services. As well, we offer tax preparation, payroll, and QuickBooks training! If you have any questions or are interested in a consultation, do not hesitate to reach out. We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Thank you for taking the time to read our Basics of Accounting series and we hope you’ll return for future learning! Until next time!

​Hello, readers! Welcome back to the Hoods Tax & Accounting blog! If this is your first time here, welcome! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting. Our blog is also dedicated to educating you about tax-advantaged savings accounts, tax provisions, programs, and more! We aim to provide you with the tools needed to meet your short and long-term goals. Our seasoned professionals are experts on the tax code, eligible deductions, and QuickBooks—all necessary fundamentals for saving you money! The Hoods Family has been around since 1988 and our comprehensive accounting and tax planning services are among the best in the Lowcountry. If you’re in need of tax preparation, accounting, QuickBooks training, or business consulting services, do not hesitate to schedule an initial consultation!
 
We recently wrapped up a three-part series on Bookkeeping Basics, which explained bookkeeping fundamentals in an easy-to-understand format. From understanding different kinds of accounts to the nature of double-entry, our series breaks down bookkeeping into its requisite parts. What’s the difference between a debit and a credit? Does single or double-entry bookkeeping suit your business better? How do you prepare financial documents? What are the bookkeeping best practices which will take your business to the next level? The answers to these questions can be found in our previous posts. Bookkeeping is one of the most essential building blocks of any successful business and the precursor to accurate accounting. Therefore, we recommend giving this series a read before delving into our Accounting series. 
 
Today, we’re continuing our exploration of the art of accounting. In part one, we discussed why accounting is an essential function of managing a business of any size. We detailed what exactly accountants are responsible for, as well as how they execute these responsibilities. Like bookkeeping, accounting is separated into distinct types. We provided an overview of the differences between these types of accounting and how to determine which type is suitable for your business. In addition to answering a few common questions about accounting, we shone a light on the benefits of hiring a professional accountant. If you’re interested in learning the basics of accounting, definitely check out our last article!
 
Today, we’re expanding our understanding of accounting by breaking down the principles which guide the practice. Accounting uses precise data and formulas to assess the financial health of a business. Like any mathematical endeavor, there are hand-and-fast rules to accounting. Professional accountants spend years in specialized degree programs and certifications to learn how to perform these calculations correctly. Today, we hope to impart a few of the overarching principles which govern accounting and give you a sense of confidence in your accounting skills. 
 
Accounting Principles
 
The accrual principle is actually one we’ve discussed before. If you read part one, you already know the difference between accrual accounting and cash-basis accounting. Well, as you might guess, accrual accounting is backed by the accrual principle. This principle is based upon the assumption that transactions will be recorded in the accounting period when they are incurred, not when the cash associated with the transaction actually exchanges hands. For example, if Company A agrees to produce $3,000 worth of products for Company B, this transaction would be recorded immediately, not when the products are delivered or when the invoice for the products is paid. Make sense? This principle assumes reporting transactions immediately is more accurate. The IRS requires most businesses to perform accounting according to this principle because they also believe this method is more accurate. 
 
The supporting principle to accrual accounting is the matching principle. The matching principle relies upon the assumption revenue should be recorded alongside corresponding expenses. For example, if Company A sold 32 units of product, in addition to recording revenue, they would also record a deduction in inventory. You might find the matching principle familiar and, if you remember our breakdown of double-entry bookkeeping in our Bookkeeping Basics series, then you would be right! The matching principle is the basis for double-entry and is not used for other types of bookkeeping, such as cash-basis. 
 
The conservatism principle is similar to the accrual principle in that, with this method, you record expenses and liabilities as soon as they occur. However, the conservatism principle differs from the accrual principle in that, with this method, you would wait to record revenues and assets until you are sure they will occur. For example, using the previous example, Company A would not record the $3,000 worth of revenue until Company B paid the invoice, but they would record the expenses accrue in producing $3,000 worth of products. This principle is considered conservative as profits are routinely understated on financial statements. While you never want to overstate profits, understating profits can lead outside entities or investors to incorrectly assess your company as underperforming. The advantages of such a principle are a better projected financial future, as profits are pushed to later dates. 
 
The consistency principle isn’t as much a method for the recording of business’s financial performance, but rather a fundamental building block for multi-year accuracy when evaluating a business’s financial performance. This principle assumes you should maintain a single accounting method for as long as possible. Frequently jumping between different methods of accounting can make it difficult to assess the long-term growth or decline of a business. Following the consistency principle means you’ll only switch to another accounting method if, and only if, a better method comes along. 
 
The cost principle assumes businesses should record assets, liabilities, and equity investment at the price they paid to purchase. The advantages of aligning yourself with the cost principle are a simplified entry of financial data and the figures entered are verifiable. However, the disadvantages of the cost principle are its lack of accuracy. The cost principle assumes the value of assets remains the same as when you first purchase them and, if you’ve ever bought a car, you know the value of an asset can depreciate over time. Likewise, assets can appreciate over time, too. For example, if Company A invested $5,000 in Company B in 1999 and, by 2021, Company B increased its worth by 20%, this investment would have increased by $1,000. However, with the cost principle, the accounting for Company A will not take this increase into account. As you can see, this would result in skewed figures for both assets and liabilities. More and more, businesses are moving away from the cost principle, in favor of adjusting initial purchases prices to their fair values periodically. 
 
Now the going concern principle is the answer to the cost principle. The going concern principle assumes a business will continue to operate and, thus, can reasonably forestall the acknowledgment of certain expenses like depreciation. These expenses will have to be accounted for eventually, but the going concern principle offers a bit of leeway for business owners. 
 
The economic entity principle could be considered a basic business doctrine. This principle is the basis for keeping business and personal transactions separate. For tax purposes, mixing the assets and liabilities of two or more businesses is unadvised. Financial statements should reflect the independent financial state of a single business entity. In the event of an audit, messy records can lead to problems. Even a single business with multiple divisions might benefit from keeping records of expenses and revenue separate. 
 
The full disclosure principle, as you might assume, puts forth the idea it’s the responsibility of a business to provide context for financial statements where necessary. Any information which might affect how a recipient may interpret the contents of financial statements should be accompanied by clarification. Examples of full disclosure might include an explanation of a change in accounting principle, an explanation for a non-monetary transaction, or an explanation of a high volume of transactions with a single party. When financial statements are created for management purposes, full disclosure is generally not necessary. The full disclosure principle applies most often when submitting financial statements to entities outside of the business, such as the IRS. 
 
 
If you can believe it, these are only a handful of the accounting principles which govern accounting! We hope we’ve given you an easy-to-understand breakdown of these principles. In the next part of this series, we’ll continue learning about accounting principles. We’ll answer a few more of your most frequently asked questions about accounting, too! Hoods is here to make bookkeeping and accounting approachable. Since both of these practices have the ability to make or break a business, we want to make sure each small business has the very best basis for success! We offer bookkeeping, accounting, and business consulting services. As well, we offer tax preparation, payroll, and QuickBooks training! If you have any questions or are interested in a consultation, do not hesitate to reach out. We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Until next time, thank you for reading! 

​Hello, readers! Welcome back to the Hoods Tax & Accounting blog! If this is your first time here, welcome! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting. Our blog is also dedicated to educating you about tax-advantaged savings accounts, tax provisions, programs, and more! We aim to provide you with the tools needed to meet your short and long-term goals. Our seasoned professionals are experts on the tax code, eligible deductions, and QuickBooks—all necessary fundamentals for saving you money! The Hoods Family has been around since 1988 and our comprehensive accounting and tax planning services are among the best in the Lowcountry. If you’re in need of tax preparation, accounting, QuickBooks training, or business consulting services, do not hesitate to schedule an initial consultation!
 
We just finished a three-part series on Bookkeeping Basics, which explained bookkeeping fundamentals in an easy-to-understand format. From understanding different kinds of accounts to the nature of double-entry, our series breaks down bookkeeping into its requisite parts. What’s the difference between a debit and a credit? Does single or double-entry bookkeeping suit your business better? How do you prepare financial documents? What are the bookkeeping best practices which will take your business to the next level? The answers to these questions can be found in our previous posts. Bookkeeping is one of the most essential building blocks of any successful business and the precursor to accurate accounting. Therefore, we recommend giving this series a read before delving into today’s article. 
 
The topic for today is accounting. Many are unsure of the difference between bookkeeping and accounting. To be sure, there’s plenty of overlap between the two professions and many small business owners find themselves donning the hats of both accountant and bookkeeper. However, there is a notable difference between the two. Bookkeeping, on the one hand, deals with compiling raw data. Transactions must be recorded into the proper accounts and underlying subtypes. These entries must be entered accurately to ensure the financial statements derived from the data truly reflect the health of the business. Bookkeeping must be done regularly (i.e. weekly or monthly), as businesses continue to accrue transactions. Accounting, on the other hand, uses the financial information yielded from bookkeeping to plan and file taxes, as well as give advice to improve the health of the business. Both bookkeeping and accounting are fine financial arts. We hope to give you the information you need to understand the purpose of both and determine whether to invest in a bookkeeper or accountant for your business’ needs. If you’re interested in learning more about the basics of accounting and how proper accounting can increase the growth of your business, read on! 
 
Why is accounting important?
 
It’s important to keep track of expenses, right? Would you say it’s also important to pay back outstanding debts? A company’s liabilities, revenues, and equity all play an equal role in determining how well a company is performing and where changes should be made to improve performance. If you agree it’s necessary to understand the unique demands on a company’s cash flow, as well as the federal and state obligations concerning a company’s taxes, then you agree accounting is a vital aspect of any company’s organizational structure. 
 
From the bottom upwards, accounting uses business transactions to assist management in developing expectations for the future of the company and adjust their strategy accordingly. For example, accounting can be as simple as an employee retaining receipts from a business trip and these receipts being written off come tax season. Accounting could be utilizing quarterly revenue statements to estimate yearly tax payments and setting aside this money preemptively. Accounting could also be the complex process of using financial statements to plan hiring patterns for the next year and to draw investors.
 
Accountants are responsible for a host of business necessities, from filing financial statements with authorities such as the Internal Revenue Service or the stock exchange, to creating budgets which allow for full operations while maximizing profitability. You might think of accountants as doctors, attempting to diagnose the illnesses of companies and recommending lifestyle choices which will help companies achieve optimal health. 
 
Types of Accounting
 
Just as bookkeeping is divided into distinct types—single-entry and double-entry—accounting is similarly divided. The first type of accounting is cash accounting. This is the simplest method, as only cash transactions made by the employees of a business are recorded. This can include a number of business expenses, including transportation, lodgings, and food. The basis of these records are receipts retained by employees. This can also include expenses paid for with cash, such as supplies and equipment. Also known as cash-basis accounting, this method records payments and expenses when the cash exchanges hands (i.e. bill paid, product bought). This type of accounting is, of course, better used by cash-heavy businesses. This type of accounting would not work well for large corporations with complex financial structures, as this type of accounting would fail to show the true position of the company’s accrued liabilities. 
 
For this reason, accrual accounting is the method often used by bigger businesses. While accrual accounting does record cash transactions, this type also takes into account credits, debits, and other forms of transactions. This can include money owed by customers on store credit or money owed to customers on store credit. Essentially, regardless of whether a cash transaction occurs or not, a transaction can still be recorded in the corresponding accounts with accrual accounting. 
 
Corporations (or any business with over $25 million in gross revenue) are forbidden from using anything other than accrual accounting. However, small businesses have a choice between accrual accounting and cash-basis accounting. How do you decide? The method of accounting you choose has everything to do with time. When do you want your books to reflect a transaction? If you choose to follow the cash-basis accounting method, your books will reflect a payment or expense when the payment or expense is fulfilled. For example, if your business makes a sale on the 13th of November but the invoice isn’t paid until the 12th of December, the transaction will not be recorded until the 12th. If you choose to follow the accrual accounting method, however, your books will reflect a payment or expense as soon as the transaction occurs. Accrual accounting is considered more accurate because you can plan for incoming and outgoing cash flow. Cash-basis accounting will give you an accurate reflection of what’s currently in your accounts, but may struggle to reflect the full picture. That said, cash-basis is often less complicated to learn.
 
As well, it’s important to note, with cash-basis accounting certain expenses and revenue may not be recorded until the following year. For example, an expense incurred in late 2021 but not paid until early 2022, could not be deducted from a businesses 2021 tax return. The same is true for revenue. Consider the tax implications of whichever type of accounting you choose. 
 
Should I hire a professional accountant?
 
There is a certain diligence and attention-to-detail required to perform accurate accounting. As well, accountants are held to a set of widely accepted standards, including (but not limited to) the generally accepted accounting principles (GAAP) and the rules of the Financial Accounting Standards Board. Accountants are privy to a long set of principles which govern their recordkeeping, financial reporting, and advice. We’ll cover a number of these principles in later parts of this series, but many accountants train for years to understand the complex inner workings of businesses, both big and small. Many new entrepreneurs and business owners can benefit from the expertise of a seasoned accountant, even if they believe they are equipped with the mathematical skills to perform their accounting duties themselves. Of course, you must make the best decision for your business, but investing in an experienced accountant is almost never a bad decision.
 
 
You’ve made it to the end of the first part of our Basics of Accounting series! Thank you for taking the time to read about cash-basis and accrual accounting, as understanding the difference between these two types is the first step to understanding accounting. In the next part of this series, we’ll cover the financial principles which govern accounting. We’ll also delve into the tax responsibilities of accountants, as well as a few best accounting practices for small businesses. The health and sustainability of your business is the foremost concern of any good accountant. That’s why our highly-trained accountants at Hoods Tax & Accounting take ample time to study the structure of your business and learn your unique goals. We offer bookkeeping, accounting, and business consulting services. As well, we offer tax preparation, payroll, and QuickBooks training! If you have any questions or are interested in a consultation, do not hesitate to reach out. We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Until next time, thank you for reading!