Being a business owner does not necessarily make you understand the accounting. You did not start your business to be an accountant of course. But having understanding about the basic accounting will be an advantage for you to make informative and accurate decisions about your business. In the long run it will help you to make understand about your business finance and predict the future of your company by your past accounting figures.
Also, it is it essential for your day-to-day business operations as well to understand the basic accounting concepts. This will save both your time and money as an entrepreneur. If you are using an accounting software, still it is important to know the ground rules of accounting to understand the financial status of your business.
So here are the basic accounting concepts for every business you should know;
- Accruals concept
Understand the difference between the accrual and cash basis of a business. Accrual concept requires transactions to be recorded in the time period in which they occur, regardless of when the actual cash flows for the transaction are received.
- Consistency concept
Always stick to one accounting method. The sole purpose of the consistency concept is to ensure that transactions or events are recorded in the same way, from one accounting year to the next.
- Going concern
The going concern concept is the assumption that business will remain in business for the foreseeable future. It assumes the business entity is in good standing and will continue for future as well.
- Conservation concept
The conservatism principle is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being received. In simple terms expenses should be realized sooner than revenue.
- Economic entity concept
Always make sure your business and personal financials are separate from each other. Economic entity concept states that a business entity’s finances should be keep separate from those of the owner, partners, shareholders, or related businesses. This is a fundamental concept in accounting.
- Materiality concept.
Record all important transactions on the accounting books. It means all that financial information that is likely to influence a knowledgeable person’s judgment should be captured in the preparation of the financial statements of the company.
- Matching concept
Record expenses related to revenue in the same period as the revenue. The purpose of the matching concept is to avoid misstating earnings for a period.