3 Business Accounting Principles that Make or Break You

Business accounting is the art of analyzing the financial position and operating results of a business from a study of its sales, purchases, overhead, etc. In other words, each department of a business gathers the results of their processes to understand how the company is doing financially and how to improve those figures.

Contrary to popular belief, accounting in business is not a science, but an art-form. It is not always black and white, adding and subtracting. There are decisions to be made according to preferences of the business operations.

Relevance and Reliability are the 2 main reasons why accounting is so important for decision makers of a business.

Relevance in accounting pertains to how useful a bit of information is to a company. The potential uses will depend on the type of company and each company may be looking to learn something different.

Accounting information that is relevant has a predictive value that helps the business make sound predictions about the future direction of the market and their company. The information can give valuable feedback as well by confirming theories and examining why events took place.

Timeliness is an aspect of relevance, which deals with having information available to decision makers when that information still has significance to sway the decision.

Reliability is determined by how verifiable and accurate the accounting measurement is in the business. The neutrality of information also plays a role in how useful accounting figures are for determining reliability.

Verifiability is a type of double checking the accuracy of calculations. Multiple people or groups will use the same method of calculation and agree that the measurement originally taken is correct.

Accuracy is known when all the numbers check out. Accuracy is high when each part of an equation confirms that the answer is correct and it represents the company's resources.

Neutrality means not worrying about the outcome of the calculations, but concentrating on the information being reliable and relevant.

Comparability, which includes consistency, is the third quality that interacts with relevance and reliability to contribute to the usefulness of business accounting as well.

Comparability looks at the similarities and differences of two different companies, markets, or time periods. Information about a particular enterprise is very useful when compared with similar information about other enterprises. It can also be useful to one business for comparison of different time periods. Comparability between enterprises and consistency in the application of methods over time increases the informational value of comparisons of economic opportunities.

Studying these business accounting principles and qualities can prove to be very valuable for an enterprise. But an extensive study is required to effectively use these principles.

Because of the importance and the intricacy of these operations, most businesses do not want to take the time to learn these calculations themselves. This is when it is wise for a company to invest in accounting software.

At the end of the day business accounting can greatly assist owners to make decisions. If the business accounting is done well, the results of decisions are more profitable. But, if it is done poorly, making decisions from that information may ruin the company.