Entrepreneurs and small business owners, congratulations on taking the plunge! As you navigate the exciting yet demanding world of running your own company, understanding your business’s fiscal health becomes paramount. This is where these principles step in, acting as the foundation for accurate reporting. 

But what exactly are accounting principles, and how do they apply to your business? Buckle up, because we’re about to delve into the five core principles, including basic accounting principles, that ensure your fiscal statements adhere to the standards. By grasping these principles, you’ll gain a clearer picture of your company’s financial performance and make informed decisions that propel your business forward. 

Five Accounting Principles That You Should Know 

Accounting principles are a set of rules and guidelines that govern the process of financial reporting. These principles ensure that financial information is recorded, classified, and presented in a consistent and accurate manner. By adhering to these principles, businesses can provide stakeholders with reliable and transparent financial statements. 

There are five fundamental accounting principles that form the basis of financial reporting: 

1. The Revenue Recognition Principle
2. The Cost Principle 
3. The Matching Principle 
4. The Objectivity Principle 
5. The Full Disclosure Principle 

Understanding these principles is important for business owners to maintain accurate financial records and make informed decisions. 

Revenue Recognition Principle 

The revenue recognition principle dictates when and how revenues should be recognised in a company’s financial statements. According to this principle, revenue should be recognised when it is earned and realisable, regardless of whether the cash has been received. This means that revenue should be recorded when goods or services are delivered to customers, and the company can reasonably expect to receive payment. 

For example, if a company sells a product to a customer on credit, the revenue should be recognised at the time of the sale, even if the customer has not yet paid. This principle ensures that revenues are recorded in the same period as the expenses associated with generating those revenues, providing an accurate depiction of the company’s financial performance. 

Cost Principle 

The cost principle, also known as the historical cost principle, states that assets should be recorded at their original cost when acquired. This principle requires businesses to record the purchase price of assets rather than their current market value. By adhering to the cost principle, businesses can maintain consistency and objectivity in financial reporting. 

For example, if a company purchases a piece of equipment for $10,000, the cost principle dictates that the equipment should be recorded at its original cost of $10,000. This principle ensures that assets are not overvalued or undervalued, providing a more accurate representation of the company’s financial position. 

However, adhering to the cost principle doesn’t mean you completely ignore changes in asset value. Depreciation, the gradual decrease in an asset’s value over time due to wear and tear, is factored in to provide a more realistic picture of the asset’s worth. 

Curious about the top reasons to outsource your accounting services in Singapore? Check out our blog for all the details! 

Matching Principle 

Imagine a scenario where you spend a significant amount on marketing materials in January, but most of the leads and sales generated from those materials occur in February and March. Should you record the entire marketing expense in January’s financial statements? 

The matching principle comes into play here. It dictates that expenses should be matched to the revenue they helped generate in the same accounting period. In our example, while some of the expenses might be recognised in January, a portion should be deferred and recognised in February and March when the sales occur. This principle works hand in hand with the going concern principle, which assumes that the business will continue to operate in the foreseeable future and meet all of its financial obligations. This allows for the deferral of certain expenses, such as depreciation, to later periods when they can be matched with the corresponding revenue. 

This principle ensures a more accurate portrayal of your company’s profitability by reflecting the costs incurred to generate the revenue reported during that period. 

Objectivity Principle 

The objectivity principle, also known as the verifiability principle, states that financial data should be supported by objective evidence. This means that financial transactions should be recorded based on factual information rather than personal opinions or estimates. By adhering to the objectivity principle, businesses can enhance the reliability and credibility of their financial statements, especially when it comes to switching between different financial reporting methods. 

For example, if a company purchases inventory from a supplier, the transaction should be supported by a purchase order, invoice, and delivery receipt. These objective pieces of evidence validate the occurrence of the transaction and the amount recorded in the financial statements. 

Full Disclosure Principle 

The full disclosure principle mandates that all material information affecting your company’s monetary position and performance should be disclosed in the fiscal statements or accompanying footnotes. This includes both positive and negative aspects, such as potential liabilities, contingent assets, and ongoing legal proceedings. 

For example, if a company has a pending lawsuit that could have a significant impact on its fiscal condition, the full disclosure principle requires the company to disclose this information in the fiscal statements and provide additional details in the accompanying notes. This principle helps stakeholders make informed decisions by ensuring that all relevant information is disclosed. 

By adhering to this principle, you provide a comprehensive and transparent picture of your company’s monetary health to stakeholders. This transparency builds trust and allows them to make informed decisions based on a complete understanding of your business. 

Want to understand why financial statements are crucial for your business? Dive into our detailed blog post to explore the significance and benefits of maintaining accurate records. 

How Do Accounting Principles Help in Maintaining Financial Records Accurately? 

These accounting principles provide a framework for recording fiscal transactions consistently, ensuring the accuracy and comparability of fiscal statements. They guide business owners on how to measure, record, and report information, promoting transparency and reliability in fiscal reporting. 

Applying the Accounting Principles 

Now that we have explored the five basic principles, let’s discuss how businesses can apply these in their reporting processes. By following these principles, businesses can ensure the accuracy, consistency, and transparency of their financial statements. 

1. Establish Accounting Policies: Businesses should develop and document accounting policies that align with the accounting principles. These policies should provide guidance on how to recognise revenues, record expenses, and disclose relevant information. 
2. Maintain Accurate Records: It is essential to maintain accurate and detailed records of all transactions. This includes invoices, receipts, bank statements, and other supporting documents that validate the occurrence and amounts of transactions. 
3. Use a Reliable Accounting System: Implementing a reliable accounting system can help businesses automate financial processes, ensure data accuracy, and generate accurate reports. This system should be capable of applying these principles and producing reliable statements. 
4. Regularly Review Financial Statements: Businesses should regularly review their financial statements to identify any potential errors or inconsistencies. This review process helps ensure the accuracy and integrity of the financial information presented to stakeholders. 
5. Seek Professional Advice: In complex accounting situations or when these principles are ambiguous, businesses should seek professional advice from qualified outsourced accounting services. These experts can provide guidance and ensure compliance. 

By applying these practices, businesses can maintain the highest standards of financial reporting and provide stakeholders with reliable and transparent information. 

Singapore Financial Reporting Standards (SFRS) 

In Singapore, the accounting standards based on IFRS are known as Singapore Financial Reporting Standards (SFRS). The Accounting Standards Council (ASC), now known as ACRA, has mandated that all companies with financial periods starting on or after January 1, 2003, must comply with SFRS. While SFRS is primarily based on International Financial Reporting Standards (IFRS), it incorporates certain adjustments to align with local laws and regulations. 

SFRS consists of 41 standards that cover various accounting topics, including leases, employee benefits, income tax, and more. Companies incorporated in Singapore, including branches of foreign companies, are required to follow SFRS when preparing their financial statements, which include balance sheets, income statements, cash flow statements, and explanatory notes. 

Singapore Accounting Standards for Small Entities (SFRS for SE) 

Small and medium-sized enterprises (SMEs) form a significant part of Singapore’s economy. However, complying with the full set of SFRS can be complex and burdensome for these SMEs due to their limited resources. To address this challenge, the International Accounting Standards Board (IASB) introduced the Singapore Financial Reporting Standards for Small Entities (SFRS for SE) in January 2011. 

SFRS for SE aims to make financial reporting easier for SMEs while maintaining high quality, transparency, and comparability. It simplifies certain requirements and disclosure obligations, making it more cost-effective for small entities. The rules for the measurement and recording of financial transactions are also less detailed compared to the full set of SFRS. 

Eligibility Criteria for SFRS for SE 

To qualify for implementing SFRS for SE, companies must meet certain eligibility criteria: 

1. Not a Publicly Accountable Company: An entity is considered publicly accountable if its debt or equity instruments are traded in a public market, it is a deposit-taking entity, it is a public company defined under the Singapore Companies Act, or it is a charity defined under the Charities Act. 

1. Small Entity: A company is categorised as a small entity if it meets at least two of the following criteria for the previous two consecutive years: 

• Total annual revenue of not more than S$10 million. 

• Total gross assets of not more than S$10 million. 

• Total number of employees of not more than 50. 

Newly incorporated companies are eligible to use SFRS for SE in the first two years of their incorporation. However, they must satisfy the eligibility requirements for the subsequent years to continue using SFRS for SE. 

Choosing Between SFRS and SFRS for SE 

When deciding between SFRS and SFRS for SE, companies should consider the following factors: 

• Growth Plans: If a company has plans for expansion, going public, or significant growth, it may not qualify for SFRS for SE. In such cases, sticking with the full set of SFRS would be more suitable. 

• Transition Cost: Transitioning from the full set of SFRS to SFRS for SE can incur expenses for staff training, software upgrades, and system changes. If a company is already successfully using the full set of SFRS, switching to SFRS for SE may not be cost-effective. 

• Lender Requirements: Companies seeking loans or funding from banks should consider the requirements of lenders. Some lenders may prefer financial statements prepared according to the full set of SFRS, limiting funding options for companies using SFRS for SE. 

It is important to carefully evaluate these factors and assess the long-term implications before making a decision. Small businesses that anticipate crossing the size threshold for SFRS for SE in the near future may be better off using the full set of SFRS from the beginning. 

Conclusion 

Understanding and applying the five basic principles of accounting is essential for maintaining accurate financial records and providing stakeholders with reliable information. The revenue recognition principle, cost principle, matching principle, full disclosure principle, and objectivity principle form the foundation of financial reporting. 

By adhering to these principles, businesses can ensure consistency, accuracy, and transparency in their financial statements. Implementing robust accounting practices, using reliable accounting systems, and seeking professional advice when needed can further enhance the integrity of financial reporting. 

Remember, accounting principles are not just about numbers; they are about maintaining trust, making sound business decisions, and building a solid financial future for your organisation. 

How Can Outsourcing Accounting Services Benefit the Company? 

Understanding and applying accounting principles is crucial for any entrepreneur or small business owner. These principles provide a framework for accurate reporting, which is essential for effective business management, fiscal analysis, and informed decision-making. By outsourcing accounting services, you can gain access to expertise, improve efficiency, and free up valuable time to focus on growing your business. 

For a smooth and successful experience with your business finances, consider partnering with a reliable accounting firm. Get a free consultation with our team at Grof to discuss your specific needs and explore how we can help your business thrive.