Basic accounting concepts

There are a few main of concepts in accounting that one should understand before they start accounting for their own firm. These accounting concepts develop a strong foundation and inform you the working of accounts. Have a look at the 6 accounting concepts that can clear your accounting basics and thus help your company to get the accounts right (Also see 5 consequences you need to face with bad accounting).

Accruals concept

According to this accounting concept, revenues should be recorded when they are earned and not before that and expenses should be documented when services or products are utilised. This means that a company may recognize profits, losses, and sales in amounts that differ from what is recognized and the amount of cash that is received from clients or the amount of cash that is paid to employees and suppliers. Auditors only verify a company’s financial statements that are prepared using this accounting concept.

Going concern concept

All financial statements (income statement, balance sheet, cash flow statement etc) of a business are prepared as if the company will continue to operate in future. This means that the recognition of expenses and revenues under this assumption may be can be allocated to a future period while the business is still in operation. Or else, all the expenses are quickly recognized in the current period and the assets will be valued at break-up value.

Consistency concept

According to this concept, a business should continue using the particular accounting method that it is using and advance in that method unless there is necessary reason to change. This way the financial statements of that company, which are prepared in different periods, can be compared in a consistent and reliable way.

Conservatism concept

According to this concept, the revenues of a business are only documented, when there is a logical certainly of their realization. On the other hand, expenses are documented sooner, when there is a logical prospect of their realization. The conservatism concept is more likely to bring about conservative financial statements.

Matching concept

According to the matching concept, the revenue expenses of a company must be recognised in the same period when the revenue was recognised. This way there would be no delays of expense recognition into later accounting periods. So, when someone views the financial statements of a company, they can be assured that all parts of a transaction are recorded in the same time period.

Economic entity concept

According to this concept, business transactions should be separated from personal transactions of its owner. Mixing up business and personal transactions in the financial statements of a company is way too common, especially for those entrepreneur with no accounting background (Also see Accounting – Five mistakes to avoid for business success).

These are the 6 fundamental concepts of accounting. Understand them and apply them while recording accounts of your company in order to avoid mistakes and practice accuracy in your accounting. If you still lack the confident to apply them, engage an accounting firm in Johor Bahru and let the experts give you a hand.