Why Should I Consider Adopting an ERP System?February 7, 2023
Here are 5 ways an ERP system can transform your business: It’s easy to get connected, and at gotomyerp, we’re here to help. Sign up online or give us a call today.
No matter the size and scale of your business, you’d always need a solid model to record and manage financial transactions. Accounting not only helps you organize your financial data in a meaningful way but also uses it to make important managerial decisions. Accurate financial data processes lead to more relevant decision-making and, subsequently, higher organizational efficiency. Luckily, QuickBooks helps you check all the boxes! Before you subscribe to a version that suits your needs, make sure you’re well aware of important modern accounting principles.
Here are 5 accounting principles:
Most businesses tend to drag their revenue recognition process, even if they’re using QuickBooks—mostly out of procrastination. This goes against the revenue principle. According to this principle, any revenue that the company earns should be recorded and recognized at the point of sale. Most businesses wait for the customer to make the cash payment to recognize the revenue formally. Any sale made should be recorded the moment a buyer gains legal possession of the commodity or avails the service—irrespective of when the transaction takes place.
This principle is quite similar to the previous one. Just like revenue, expenses should also be recorded in books the moment they’re incurred. The moment you accept any goods or services from another entity, the expense should formally be recorded in QuickBooks. The principle doesn’t take into account when and how the billing takes place.
The matching principle helps you match and balance out your revenues and expenses. The underlying theory is that every time you sell a product, you must incur some sort of expense to make it happen. This includes selling expenses, manufacturing expenses, and administrative expenses.
As per the matching principle, every time you record some sort of revenue, you should also match it up for an item of revenue. For instance, if you’ve sold one taco and record the sale on your QuickBooks account. To match it up, you should also simultaneously record entries for the expenses that you incurred to buy the taco shells, meat, toppings, and other ingredients. If the two entries are recorded at different time periods separately, it could lead to discrepancies and inconsistencies within your accounting data.
As a business, when you apply all three of the above-mentioned principles in practice, you’re said to be operating under the accrual accounting method.
To understand this principle, you first need to know what historical cost means. According to Investopedia, a historical cost is the value of an asset at the time when it was first acquired. In the United States, the historical cost method is used to measure the value of fixed assets as per the provisions of Generally Accepted Accounting Principles (GAAP). The opposite of historical cost is the current prevalent market price.
According to the cost principle, whenever you’re recording the cost of any item in your QuickBooks account, always use the historical cost and not the resell cost. Let’s say you’re a real-estate business that buys and sells land and property. Every time you sell some property, record the historical cost and not the one that’s currently trading in the fair market.
The objectivity principle of accounting states that when you’re entering data into your QuickBooks, you should only use data that are verifiable and factual. Transaction values that are entered into the accounting software should never be subjective or estimates. You should not opt for subjective data, even if it sounds better or more appropriate.
This is important because most accountants usually operate under a set of assumptions in addition to concrete basic principles. This often brings in the effect of opinions and biases on your financial decision-making, leading to differences among the organization. This will also keep your business from falling into some kind of trouble with the auditing authorities.
With QuickBooks, you not only stay on top of the above-mentioned 5 accounting principles but also put them into practice effectively. Get in touch with gotomyerp if you’re looking to invest in QuickBooks hosting services. We are also offering QuickBooks consultancy and support services.