Key Accounting Principles Every Small Business Owner Should Know

Okay, so you're a small business owner, maybe small to medium sized business owner. You're either a solopreneur or you've got tens or hundreds of employees. And a question that you ask yourself or you ask me is what are the key accounting principles that I need to be aware of as a small business owner? And for me it comes down to a few different things. Right. So generally accepted accounting principles is essentially the language that accountants focus on. And usually when we're preparing financial statements, we have to adhere to certain generally accepted accounting principles. And for the most part, if you are a small to medium sized business owner and you're having a review engagement completed or an audit engagement completed, it's required that we follow a specified framework. And the framework that you would follow in this instance would be accounting standards for private enterprise. So it's called aspe. And essentially the framework there outlines how all of the items on your financial statements come together and essentially some of the judgment and the criteria of how to report and disclose things in your financial statements. So in many instances there's hundreds of accounting principles that we should be aware of. But some of the main ones I would talk about would be revenue recognition. So a policy that would identify when you recognize revenue being earned inside your business. So, and the key element is earned, so when your revenue, not necessarily when you get, get the cash in your business, but what is the triggering event that allows you to recognize the revenue being earned in your business. Pretty important policy. One area that CPA Canada focuses a lot on in their testing for new CPA candidates is on that revenue recognition. Because if, if you want to recognize revenue, sometimes we have some biases to recognize it early or to not recognize it at all. So a good example, we don't want to recognize revenue at all because we don't want to pay tax on that income. Right. Or if you have financial statements that you need to show to maybe a potential buyer, recognizing revenue early would be great because it would inflate your revenue. But according to aspe, those fundamental accounting principles, revenue recognizing revenue needs to be triggered at the moment it's earned and it will define that. So typically there's a policy on your statements that says this is when revenue would be earned. So it's very clear for any user of the financial statements to identify that. A couple other main areas that we need to identify is, or accounting policies is related to our capital assets. You know, what is the useful life? What is the type of amortization we're using? Accounts receivable is it related to trades receivable, intercompany transfers between one organization another. How did they get created? Is there intercompany transactions that happen and are they at fair market value? Inventory, how are we managing our inventory? Is it on a first in, first out? Is it on a cost average? Is it on a last in, first out basis which actually doesn't follow the ASPE rules, or is it at specified costs? So there's a multitude of different areas. The accounting policies really describe the eligible areas and which one you choose for your business so that when you're looking at or when anyone is looking at your financial statements, you read those policies and disclosures and it identifies what the accounting principles are that you follow. The other last one that I'll talk about is long term debt as a policy and as a note disclosure. Well, typically when it comes to long term debt, we have to identify certain elements according to that policy, which is the amount that's outstanding, the repayment period, the interest rate, and what security is on that loan. So the accounting principles, there's tons of them and there's books, you know, we call them the Accounting Standards Handbook and it's thousands of pages. We learn this over years and years. But what I've just provided you is a highlight of what would be included in your financial statements and what you really need to know as basics for, as a small business owner of what to include there and which ones are the most important. So hopefully that, as far as accounting principles go, is very helpful for you in your search.