6 principles of accounting and their take on life
Accountants usually live by these 6 accounting principles, they are everywhere, in our decisions, in our results, in our templates, and in our analyses. For me, they can be second nature. Like any new freshman, I learned them during my first year of accounting classes - in French and in English. They have accompanied me in the past decades as I started my accounting career and matured as a professional, a middle-aged woman (geez, what a scary word), a spouse, a friend, a parent, and a mother.
1 | Cost principle: everything has a cost, record assets as soon as they are acquired/given/exchanged.
Know the value of what you are getting, and assign a cost to it. Assigning cost helps give a sense of significance. Know your numbers, know your costs. This is not about being materialistic and counting every penny in and every penny out, but taking a holistic approach for better appreciation of our actions and decisions.
Some will say that some objects or experiences are priceless. I can’t assign any value to that trip I took with my parents and family right before Covid. My parents are still talking about their gondola tour in Venice, I can’t eat ravioli anymore, my husband still looks at that picture of him in the red Ferrari and my daughters were too young to remember. However, I do know that it was pricey and that the credit card bill was salty. Money is usually a factor, And if not money, it is always time. Our time has a cost and it is important to be able to determine the value of our time.
2 | Matching principle: match revenue with expenses, and always match inputs with outputs.
Know what you are getting and what you are giving up, and pair them up. For example, if you are buying a car, the car is still costly even after you are done paying for the car loan/note. You might have a car note for 3 years, but you will be using the car for 10+ years, and you should consider gas expenses, insurance, property taxes, and of course repairs and maintenance expenses that will be paid for the next 7 years you plan on using that car.
In that same vein, the cost of a college degree should probably be matched or amortized over your full professional career if you are using that degree. This is why certain professionals, like doctors and lawyers, are so expensive or make more money. When you use their services, you are paying for their current expenses, but also for their expensive degrees, their student loans, and all the years they spent studying.
3 | Materiality principle: only record completed monetary translation. Accountants do not record pending deals that may not work or that are low in monetary value.
Direct translation: stop giving value to shit that does not have any value. Stop giving value to people, that do not have any material impact on your life. They do not matter, stop making them “material”. We assign value to people, we assign value to opinions, we assign value to things that most of the time do not have any place in our accounting, financial statements, work, lives, etc...
Also direct translation: do not ignore the elephant in the room! Don’t close your eyes on the fact that your partner enjoys a bottle of whisky every night and don’t pretend that these credit card bills don’t exist.
The addition, multiplication, and repetition of little details can add up; and will add up to a material instance over time. And somewhat, I still pretend that having two scoops of ice cream every night has no effect on my pants shrinking.
4 | Conservatism principle: be aware of potential liabilities or contingent liabilities. This is why accountants record accruals (estimates of potential expenses) or do a search for unrecorded liabilities.
Avoid bad surprises; in life and in business, it is always better to “watch your back”, prepare for the worst and make sure that you record or estimate any potential expenses that will arrive (and surprise you). Having a reserve for rainy days is important since you never know what might happen.
For me, the biggest lesson in conservatism was to learn how to keep some for myself. I am naturally a giver and a sharer. My annoying Type A personality like to rejoice in the over-extension of my mental inventory. The accounting practice grounded me and reminded me to be protective of my assets. I am a little bit more selfish now as I now know that the best conservatism is to always be fair with myself.
5 | Time-period principle: all businesses should report their results over a standardized period. That period can be a month, a quarter, or a year. It makes it easier for comparison and for trend analysis (said the FP&A dude and the investment analyst).
This is intuitive, my daughters get their report cards quarterly, I get my annual physical done annually and I get bank statements every month at the same time. We celebrate our birthdays on the same date every year. We need to have a period of time in our finance or in our lives to be able to make a consistent review of our results. For example, as I am approaching another decade of my life, I am assessing the past decade and making goals for the next decade coming.
6 | Consistency principle: once you choose an accounting system, an accounting measure, or assumptions, it should be followed consistently over many periods/years.
This is a hard one, especially for me. I like changes, I like new, I like shiny, I like new ideas and new approaches. However, accounting has taught me how to be consistent, in my ways, in my routine (please exercise every day), and in my relationships. If we keep changing our systems, our results will not be consistent and we are not able to compare apples against apples. Purely and simply, we are manipulating our results. The need for consistency is everywhere, in our diet, in our love life, with our children, and with ourselves.
Stop! I am consistent in my love of love shows. Yes, I spent my last Saturday on the couch with Love Is Blind 3 and I have Bachelor in Paradise waiting for the coming Saturday. And why did I record? Because I knew I would want to watch it and I knew that I love love shows. They just bring me pure joy! Pure consistency, duh!
You would say that it is easy to fit these accounting principles into my life, in my decisions, and in my assessments. I certainly have had a bit of practice in the past twenty years dissecting them through my technical accounting memos, my conversations with auditors, and many job interviews. Yes, I also repeat to my team to only record material adjustments, I regularly remind my strategic friend not to move “ a cost of goods sold vendor” to an opex category mid-year. However, I stopped telling my mom to donate my old dolls and I figured out that I still deserved that push-gift that I have only worn once.
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