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5 Basics Of Small Businesses Accounting

by Edvard Berlusconi

Cost accounting is one of the segments of accounting science that have presented the most theoretical developments. And, that in turn reflect on the practical application of companies over the last few years. It is one of the best and most widely used tools for corporate management and the protection of tax laws.

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Basics of small business accounting: Introduction

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Accounting principles are a set of norms that represent the essence of the doctrines and theories related to this science. Thus, the accounting principles govern the exercise of the profession, and respect for them is a condition of legitimacy according to the Accounting Standards. We present below the 5 SME accounting principles.

Entity Principle

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Recognizes Equity as an object of Accounting and affirms the autonomy of assets, the need to differentiate a particular patrimony of an individual, independently of the assets of individual legal entities, from the set of legal entities, without considering whether or not the purpose is to obtain profit.

The assets of an individual are not confused, nor are they mixed with the assets of the legal entity to which they belong. In practice – private expenses for individuals (managers, employees and third parties) should not be considered as company expenses. Private property of managers should not be confused or registered with the company.

Continuity Principle

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The continuity or otherwise of an Entity (enterprise), as well as its established or probable life, must be considered when classifying and evaluating equity variations. This continuity influences the economic value of the assets and, in many cases, the value and maturity of the liabilities, especially when the extinction of the company has a certain, expected or foreseeable term.

Whenever the Financial Statements (Balance Sheet, Income Statement, etc.) are presented and, on that date, a material fact is known that will influence the normal continuity of the company, this fact shall be disclosed through the Explanatory Note. As it is directly related to the quantification of equity components and the formation of results, and to constitute important data to gauge future ability to generate results.

Principle of Opportunity

This refers to the time when the changes in equity should be recorded. They must be done immediately and in full, regardless of the causes that originated them, including the physical and monetary aspects. When it is a future fact, the registration should be done as long as it is technically estimable even though there is reasonable certainty of its occurrence. This is the case of Provisions for Vacations, Contingencies, etc.

Principle of Registration by Original Value 

Changes in equity should be recorded at the original values ​​of transactions with the outside world, expressed in present value and in the currency of the country. These values ​​will be kept in the evaluation of subsequent changes in equity when they configure aggregations or decompositions within the company.

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Principle of Competence

It establishes that Revenues and Expenses should be included in the income statement for the period in which they were generated, always simultaneously when they correlate (Principle of Expense Comparison with Revenues), regardless of receipt or payment. The period in which they occurred always prevails. The expenses are considered occurred.

  • On sales to third parties of goods or services, when they make the payment or make a firm commitment to do so, either by investing in the ownership of the good sold or by enjoying the service rendered.
  • Upon the partial or total disappearance of a liability, whatever the reason.
  • The natural generation of new assets regardless of the intervention of third parties.

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