Concept of Special Drawing Rights (SDR’s)
What Are Special Drawing Rights (SDRs)? Special Drawing Rights (SDRs) were a part of the monetary system that was created post World War-2 in the Bretton Woods arrangement. Since the United States had almost all of the gold reserves of the world at that time, the Special Drawing Rights (SDRs) were intended as a supra-national […]
Spoilage and Rework in Job Order Costing System
What Is Rework? Rework is that part of the final produce which has not been accepted by the client because it does not meet the required specifications. However, those specifications can be met by working on the item once again. Hence the name rework. What Is Spoilage? Spoilage is also that part of the final […]
The Decline of the Big Corporation
The era of big corporations started during the industrial revolution. The past couple of centuries have witnessed the rise of these mega-corporations, particularly in the developed western world. In many cases, these corporations have become extremely powerful and have behaved aggressively with weaker nation-states as well. The idea that some private individuals can amass more […]
Series B Funding
In the previous articles, we have already learned about the seed funding stage as well as the series A funding stage. We know that entrepreneurs raise seed funding in order to be able to build the prototype of the product. After the prototype is in place, they raise Series A funding to build the actual […]
Capital Rationing and Profitability Index
In the previous few articles we have come across different metrics that can be used to choose amongst competing projects. These metrics help the company identify the project that will add maximum value and helps make informed decisions to maximize the wealth of the firm. We saw how the NPV rule was better than IRR […]
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
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