Professor John Savignano: Basic Accounting Principles
According to John Savignano, the five basic accounting principles include:
The Accounting Equation
The accounting equation is the most important of the five basic accounting principles. It states that assets equal liabilities plus equity. This simple equation is the foundation on which all double-entry bookkeeping is based. To understand the accounting equation, it is first necessary to understand what assets, liabilities, and equity are. Assets are anything a business owns, including cash, inventory, equipment, and buildings.
In double-entry accounting, every transaction is recorded in at least two accounts. The left side of the ledger is known as the debit side, while the right side is called the credit side. Debit entries are recorded on the left side of the ledger, and credit entries are recorded on the right side.
Accruals and Deferrals
Accruals and Deferrals are two of the five basic accounting principles. Accruals are when revenue is earned but has not been received, and expenses are incurred but have not been paid. Deferrals are when payments are made or received before they are earned or incurred.
The going concern principle is one of the most important principles in accounting. It states that a company should continue to operate for the foreseeable future. This means a company should have enough cash to pay its debts and other expenses. If a company cannot pay its debts, it may declare bankruptcy.
Conservatism is the principle that earnings should be reported when earned and expenses should be reported when they are incurred. This principle dictates that accountants should refrain from trying to anticipate or predict future events when preparing financial statements. Rather, they should report only on past transactions. This approach offers a more accurate picture of a company’s financial status and reduces the risk of overstating assets or understating liabilities. READ: John Savignano Discusses Career Paths for New CPAs