February 1, 2023
The Four Fundamentals of Accounting

The Four Fundamentals of Accounting

Accounting principles can be divided into four basic categories: period principle, revenue recognition principle, matching principle, and monetary unit assumption. We will cover each of these principles in this article. For more information, get help from reputable accounting companies in Abu Dhabi.

Time period principle:

The time period principle in accounting refers to the division of a company’s financial reporting period by the length of time it covers. Publicly traded companies must issue quarterly financial statements, while smaller companies may issue monthly or weekly reports. Regardless of size, the time period principle can be used to segment different jobs, operations, and financial reporting. This principle is also used by private companies, which are not required to issue quarterly financial statements. Private companies typically choose a calendar year as their accounting period, which begins on the first day of each month and ends on the last day of the fiscal year.

Revenue recognition principle:

Revenue recognition is an essential concept in accounting. Companies recognize revenue when they exchange a good or service for cash. Retailers, for example, do not recognize revenue until they transfer the ownership of their inventory to a customer. Manufacturers may recognize revenue while the goods or services are in production, while other companies may wait several years to recognize revenue from a contract. In either case, revenue recognition is an important concept.

Matching principle:

There are various basic principles in accounting. One of them is the matching principle, which requires a direct cause-and-effect relationship between an expense and an income stream. For example, a company that spends Dh 250,000 on an elaborate office system will see Dh 3,000 of that money as a depreciation expense each month. Another example is when a company spends Dh 250,000 on a television advertisement during the Olympics. The entire cost of the television advertisement is recorded as an expense in the year it is shown.

Accrual principle:

The accrual principle is one of the foundational principles of accounting. It requires that transactions be recorded in the period in which they are incurred and not the time they are paid. As such, it is a common requirement of all accounting frameworks. As an example, the current month’s utility expense is recorded, but the actual cash payment will not occur until the next month. In addition, certain types of revenue are accrued, such as Credit Sales.