Advantages and Limitations of a Budget
In the previous article, we learned about the three financial statements. We also learned how income statements and balance sheets are backward-looking financial statements. We also understood that the budget is the only forward-looking financial statement in the personal finance domain. It is the only statement that can be used to prevent economic mistakes from […]
How Buy Now and Pay Later (BNPL) Works in the Retail Industry?
The retail industry has been constantly innovating in order to become financially more viable. There are several innovations which have been introduced in the retail industry. However, very few innovations have been as effective as the Buy Now Pay Later (BNPL). The use of Buy Now Pay Later (BNPL) payments has been increasing over the […]
Valuation of a Sports Franchise: Market Approach
In the previous articles, we have already come across a couple of methods used for the valuation of a sports franchise. However, we know that both of those methods have certain shortcomings which make them unsuitable for the valuation of a sports franchise. In this article, we will discuss a third approach called the market […]
Tax the Rich Policy: A Critical Analysis
There are few issues which strike through the heart of communists in China and capitalists in America similarly. One such issue is the issue of taxes, particularly the taxes that are levied on people of the extremely high income category. The popular opinion is that the rich somehow collude with the politicians to create a […]
Sum of the Parts Valuation
Equity valuation is usually conducted for an entire enterprise. For instance, if we are trying to come up with a valuation for Apple Inc, we will usually consider Apple Inc as being one single indivisible unit. This is because the cash flows that will accrue to Apple Inc are intertwined and all of the cash […]
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.
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An Overview of Contracts and Why They are Important to Business and Society
February 12, 2025
