HOODS TAX
  • Home
  • The Hoods Family
  • Services
    • Tax Preparation
    • Quickbooks Services
  • 2024 Tax Prep Checklist
  • Contact
  • Blog
  • Login
  • Home
  • The Hoods Family
  • Services
    • Tax Preparation
    • Quickbooks Services
  • 2024 Tax Prep Checklist
  • Contact
  • Blog
  • Login

​Hoods Tax &
Accounting Blog


​​​THE INFORMATION IN THIS BLOG IS INTENDED TO PROVIDE GENERALIZED INFORMATION DESIGNED FOR A BROAD SEGMENT OF THE PUBLIC; IT IS NOT PERSONALIZED TAX, INVESTMENT, LEGAL OR OTHER BUSINESS AND PROFESSIONAL ADVICE. YOU SHOULD ALWAYS SEEK THE ASSISTANCE OF A PROFESSIONAL WHO KNOWS YOUR PARTICULAR SITUATION FOR ADVICE ON YOUR TAXES, YOUR INVESTMENTS, THE LAW OR ANY OTHER BUSINESS AND PROFESSIONAL MATTERS THAT AFFECT YOU AND/OR YOUR BUSINESS. ​

The Basics of Accounting Part II

11/5/2021

0 Comments

 
Picture
​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! 

0 Comments



Leave a Reply.

    Author

    Write something about yourself. No need to be fancy, just an overview.

    Archives

    December 2024
    November 2024
    October 2024
    September 2024
    August 2024
    July 2024
    June 2024
    May 2024
    April 2024
    March 2024
    February 2024
    January 2024
    December 2022
    November 2022
    October 2022
    September 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    January 2018
    November 2017
    October 2017
    May 2017

    Categories

    All
    1040
    1040-sr
    2019 Taxes
    2020 Tax Bill
    2020 Taxes
    2020 Tax Extension
    2020 Tax Return
    2020 Tax Season
    2021 Taxes
    2021 Tax Season
    2022 Tax Day
    401(k)
    529
    529 College Account
    529 Saving Plan
    Accountant
    Accounting
    Accounting Goose Creek
    Accounting Principles
    Accounting Services Goose Creek
    Agoraplaus
    April 15 2021
    April 15th
    Asama
    ATM
    Back To School
    Bankruptcy
    Basecamp
    Basics Of Accounting
    Black Shopping Alternatives
    Bookkeeping
    Bookkeeping Basics
    Bookkeeping Goose Creek
    Bookkeeping Goose Creek Sc
    Budgeting
    Buffer
    Building A Business
    Business
    Business Consulting Goose Creek
    CARES Act
    CARES Act 2020
    College Loans
    College Planning
    College Saving
    Common Questions
    Common Tax Mistakes
    Consulting Goose Creek
    Contact Hoods Tax And Accounting Goose Creek Sc
    Contact Hoods Tax Goose Creek Sc
    Coronavirus
    COVID 19
    COVID-19
    Cryptocurrency
    Cutting Costs
    Cutting Costs At Thanksgiving
    Cybersecurity
    Debt
    Deductions
    Digital Currency
    Documenting Your Taxes
    Donations To Your 401(K)
    Economic Impact Payment
    Effects Of A Global Pandemic
    Estate Taxes
    Evernote
    Expense Tracking
    Facebook Creator Studio
    Fake Covid Scams
    Fake Emails
    Fake Phone Calls
    Fake Text Messages
    FASFA
    Filing Taxes
    Financial Aid
    Financial Preparedness
    Financial Recovery
    First Time Tax Payer
    Getting Ready For Tax Season
    Gift Taxes
    GoDaddy
    Google
    Goose Creek
    Grants
    Hidden Tax Write Off
    Hidden Tax Write-off
    Home Owner
    Home Ownership
    Hoods Tax & Accounting
    Hoods Tax And Accounting Service
    HootSuite
    How To Claim Unpaid Stimulus Money On Your 2020 Tax Return
    How To Save Money At Thanksgiving
    How To Spend Your Tax Return
    How To Stay Safe At Thanksgiving 2020
    How To Stay Safe This Thanksgiving
    Hurricane
    Hurricane Fund
    Hurricane Plan
    Important Dates
    Important Documents
    Impulse Spending
    Income
    IRS
    Itemized Tax Deduction
    Jumpstart Your Day
    Last Minute Tax Deductions
    Last Will And Testament
    Lowcountry
    Lowering Your Tax Bill
    MailChimp
    Make Donations To Your HSA Account
    May 17th Tax Extension
    Medical Expenses
    National Podcast Day
    Online Scams
    Organization
    Owning A Business
    Pandemic
    Paying Your Tax Bill
    Payroll Services Goose Creek Sc
    Pension
    Phishing Scams
    Phishing Schemes
    Phone Call Scams
    Podcast
    Preparing For 2020 Taxes
    Preparing For Your 2020 Taxes
    Preparing For Your Taxes
    Productivity
    Productivity Tools
    Protecting Yourself From Stimulus Fraud
    Protecting Yourself From Tax Fraud
    Quickbooks
    Quickbooks Services Goose Creek Sc
    Quickbooks Small Business
    Quickbooks Training Goose Creek
    Quickbooks Training Goose Creek Sc
    Recovery Rebate Credit
    ResueTime
    Retirment Taxes
    Save Money
    Saving For College
    Saving Money
    Saving Money For Thanksgiving 2020
    Savings
    SC
    Scam Emails
    Scams
    Scam Text Messages
    Scholarships
    School Shopping
    Security
    Senior Taxes
    Senior Tax Filer
    Senior Tax Payer
    Small Business
    Small Businesses
    Social Security
    Social Security Administration
    Social Security Scam
    Spending Your Tax Return
    Squarespace
    SSI Benefits
    Standard Tax Deduction
    Stimulus Check
    Stimulus Payments
    Stiumuls Scams
    Strained Finances
    Student Loans
    Summer
    Tax Brackets
    Tax Credit
    Tax Day
    Tax Deductible
    Taxes
    Tax Extension
    Tax Fraud
    Tax Implications
    Tax Info
    Tax Payer
    Taxpayer
    Tax Paying Citizens
    Tax Planning
    Tax Preparation
    Tax Preparation Goose Cree
    Tax Preparation Goose Creek
    Tax Professional
    Tax Refund
    Tax Return
    Tax Season
    Tax Season 2020
    Taxtaxes
    Tax Tips
    Tax Write Off
    Thanksgiving
    Thanksgiving 2020
    The Dangers Of Stiumuls Scams
    Third-party Reporting
    Tips
    Tips For Financial Recovery
    Tips For Saving Money
    Todist
    Toggl
    Trello
    Tsheets
    Unable To Pay Tax Bill
    Unable To Pay Your Taxes
    Unemployment
    Unemployment Tips
    Unknown Tax Facts
    What Not To Spend Your Tax Return On
    What To Spend Your Tax Return On
    Will
    Will And Testament
    WordPress
    Working From Home
    Wunderlist

    RSS Feed

Hoods Tax & Accounting Service, LLC.
​105 Etling Ave, Goose Creek, SC 29445

Phone: 
(843) 797-5153
Email: [email protected]
Site created by Creative Consulting
Site powered by
MadeSimply
quickbooks desktop certified proadvisor logo
online quickbooks certified proadvisor logo
Hoods Tax and Accounting service logo
Hoods Tax & Accounting Service, LLC.