Double Entry Bookkeeping
The double entry rule means that every transaction has a contra entry. The concept holds that every financial undertaking has an impact on more than one item (Schroeder et al., 2019). This law applies to the dualism concept of accounting transactions. Practical application of the rule debits the asset accounts in case of asset addition and crediting the respective paying account. The opposite is applicable when incurring debts and other liabilities.
Recognition of Non-Current Asset at Cost
Most professionals adhere to the cost principle of accounting, and by this code, they register asset valuation at the original cost of purchase (Jeter & Chaney, 2019). The historical cost principle of accounting is applicable in this situation. The concept concerning such an adjustment implies that accountants will not gradually expend the asset over the useful life of the non-current asset.
Depreciation
Depreciation is an accounting phenomenon that considers the utility value of an asset. Through depreciation, an asset’s useful life gets to be accounted for by the accountants. The accounting principle governing this practice is the matching principle of accounting. The matching policy is practicable as depreciation is pitched against profits within a particular period. Accountants dispense a portion of an item’s acquisition cost against the company’s revenue for that accounting period, and this adjustment reduces the total income of the organization (Weetman, 2019). Also, Accountants debit the asset’s depreciation account as per the duality principle of accounting and treat cumulative or accumulated depreciation as the contra entry.
Writing Off of Irrecoverable Assets
Weetman (2019) explains that accountants deem an asset to be irrecoverable when all reasonable measures to get the debtor to pay the company have failed. The prudence concept of accounting dictates recognition of such costs in the financial years the company decides to forego the assets. This forfeiture entails prudential judgemental and conservatism on the part of the accountants as the application of this adjustment to the financial standing of the company is that it lowers profits for such an accounting period. Christensen et al. (2019) state that the accounting period is an essential concept as all expenses and earnings should be analyzed and evaluated to specific timelines.
Creation of Receivables Allowance
An allowance for receivable is the monetary value owed to the company that the company foresees hardship to collect (Jeter & Chaney, 2019) This is the money that the company presumes its debtors will not be able to pay before the closure of that accounting period. Prudence still applies to this accounting adjustment. Practical application of the same entails recording the allowance for receivables following the double-entry rule. This practice is a contra asset adjustment between the accounts for doubtful debts reduction and the balance on the accounts receivable.
Provision of Accruals
Accruals are services and goods already utilized by the company, but the firm is yet to pay for the same (Weetman, 2019). The provision of accruals of business expenditures is an accounting concept adhering to the conservatism (prudence) principle of accounting. This concept is the best example of the prudence principle of accounting. Immediately the expenses are accrued by the business the accountants record the transaction but revenues recorded when the company realizes sales.
Recognition of Prepayments
A prepaid expense implies business expenses that the company pays for in advance (Weetman, 2019). Accountants treat this expense as an asset to the company, and the ideal accounting treatment for the same relates to the matching principle of accounting, realization, and conservatism. Regarding applicability, the prepaid expenses are assets to the organization until the organization utilizes them.
Inventory Valuation
Valuation of inventory entails computation of all company’s stock at the end of an accounting period. Also, inventory valuation expresses the cost of doing business at a particular point in the accounting period. The historical cost principle applies to this adjustment. The assets of the company are recorded at original costs and monetary valuation extended to other factors such as stock holding costs.
Sales Revenue Recognition
Christensen et al. (2019) inform that sales revenue recognition follows the realization principle accounting. Revenue recognition occurs when a sale agreement is acceptable to both parties, and the exchange of goods and services is complete, irrespective of monetary renumeration at the time. Its practicality dictates that accountants record sales or profits whenever business transactions occur.
Withdrawal
Withdrawals are monies occasionally removed from the business by business owners. As withdrawals are cash outflows, the withdrawer’s withdrawal account is debited as accountants credit the respective asset account. The materiality principle guides this aspect of the transaction to separate personal use and business-related expenditure. Objectivity principle guides the application of this accounting adjustment by distinguishing private spending or bias away from business functions and activities.
Summary and Conclusion
Accounting principles, concepts, and assumptions have a seamless transition as they interrelate to form a collective stable accounting profession. The accounting practices detailed herein safeguard investors, the government, and the general public from exploitation by unscrupulous managers and accountants through the presentation of misleading financial statements. As such, everyone should be vigilant and conversant with accounting principles and their application in the world of business. This awareness will ensure more transparency and accountability of the accounting profession.