For every business to flourish, there are some basic success mantras which play a decisive role in establishing the firm. There are scores of IT companies, FMCGs, Pharmaceutical industries, etc around the world which are gaining tremendous impetus with their professional etiquettes of handling and dealing with businesses effectively. But to etch name amongst top industrial moguls, having competent individuals who can handle departments like Human Resources, Finance, Marketing, etc efficiently are needed. Accounting is one such area which needs professionals adept with various rules, regulations, and principles. If you also want to build a career in the field of accounting then through this blog, we will familiarise you with some of the important accounting concepts and its principles which you must understand in order to progress further.
This Blog Includes:
What is Accounting?
‘Accounting’ is a financial language that denotes how businesses are carrying forward their finances. Equally, it also refers to the analysis as well as maintaining records of all the financial information in the form of documents known as ‘Financial Statements’. In other words, we can say that accounting is the process by which a professional, in an efficient manner, records, classifies and summarize all the financial information of the company, firm or an organisation. But to proceed, an individual needs to build a strong foundation of various accounting concepts and principles. This can either be done by pursuing Accountancy courses like Cost and Management Accounting, PhD in Accounting and business management, etc or by gaining substantial work experience.
Objectives of Accounting Concepts
Here are the major objectives of Accounting concepts:
- Maintains consistency and regularity in preparing accounting statements
- Helps accountants to maintain business records
- Aims to help businesses understand rules and regulations
Basic Accounting Concepts
Since financial management and accounting plays an important role in every business organisation, it is important to stay abreast of basic accounting concepts which can be incorporated. Not only restricted to concepts and conventions but scores of other regulations also have to be understood thoroughly and followed with diligence in order to flourish. Business Entity, Money Management, Cost, Dual Resources, Time Period, Realization, Consistency, Matching, etc are some of the basic accounting concepts which are known as Generally Accepted Accounting Principles or GAAP in the business world.
List of Basic and Essential Accounting Concepts
This is one of the accounting concepts which talks about how financial statements, transactions, and a business owner should be treated separately. In simple terms, it means that an owner of an entity is separate from its product and the business account has to be separated from the owner’s account. Whatever the transaction an owner of an entity is using for personal use has to be separate from official accounting records.
Considered as one of the important accounting concepts, Money Management refers to the business transactions which are conducted in the form of money transfers, whose accounting records are kept separate. This concept deals with the accounting details in terms of transitory information.
In every business entity, the fixed assets are recorded on the basis of their main cost managed in the first year of the accounting period. These assets are recorded after subtracting depreciation. It is absolutely necessary for a business to maintain a proper account record of every product purchased and utilised.
This basic concept of dual resources mainly works under the formula of
Resources = Accountability + Impartiality
In this concept, the main aim is to maintain basic accounting terms no matter how transactions are being made.
The time period is also one of the most important accounting concepts which can either be general i.e starting from 1st January to 31st December of a year OR Fiscal Year [1st March to 28th February]. The decision of following a time period in an entity depends on an owner’s decision. The format can be followed if an owner deems for any change.
We cannot do away with the fact that resources and liabilities are a great help in earning profits. When a product is sold to the customer on a satisfactory and reasonable price, profits are earned. It is generally recorded on product selling time, not before that. Here, the basic accounting assumptions are taking into account and later the actual cost is added. In simpler terms, we can say a profit can only be taken into account when it is earned.
Consistency is the key to success. And this is also visible in the business landscape. The tracking of business activities and vision for handling any unforeseen financial situations should be taken into account while aiming for consistency.
This accounting concept deals with calculating the profit or loss in a given period of time as well as maintaining the chart of revenue and expenses.
There are certain principles which need to be followed if you own a business entity. In order to report the financial data in a professional manner, accounting principles, its rules and regulations will help you comprehensively. Let’s glance through the list of accounting principles mentioned in the pointers below:
- Accrual Principle
- Conservatism Principle
- Consistency Principle
- Cost Principle
- Economic Entity principle
- Full Disclosure Principle
- Going Concern Principle
- Matching Principle
- Materiality Principle
- Monetary Unit Principle
- Reliability Principle
- Revenue Recognition Principle
- Time Period Principle
‘Accounting’ is a financial language that denotes how businesses are carrying forward their finances. Equally, it also refers to the analysis as well as maintaining records of all the financial information in the form of documents known as ‘Financial Statements’.
Economic Entity principle
Full Disclosure Principle
Going Concern Principle
Since the business landscape is growing exponentially in the globe, it is a prerequisite to upgrade accounting concepts and maintain standards to grow. Do you want to pursue accountancy courses after 12th standard? Not sure about how to get started with it? Don’t worry! Reach out to our experts at Leverage Edu who will not only help you complete the admission formalities in the university of your choice but will also help you find a suitable scholarship based on your academic performance!