If you understand these basic ideas, you can make better financial decisions for the day-to-day business and for the bookkeepers in the long run. Here are some of the most basic ideas. Some of the basic ideas are accruals, consistency, the going concern assumption, conservatism, the economic entity, matching, materiality, the accounting equation, and the accounting period.
First, let’s talk about what accruals are. There are two ways to account for them: the accruals basis and the cash basis. In the accrual method, all expenses and incomes are added up in the same accounting period in which they happen. So, it will be recorded as a receivable as soon as the invoice is sent, no matter when it is paid. But the company’s financial statements are based on cash, so expenses and income only show up when cash is paid or received. We don’t keep track of this as an account receivable. Instead, you pay the bill or amount at that time.
The idea of consistency
A bookkeeper should also know about the consistency principle. This principle says that whatever accounting method you choose, cash basis or accrual basis, you should stick with it. This will help you keep track of how your business or venture is doing during different accounting periods. To pay taxes, you need permission from the IRS to change how you do it.
Concern for the Future and Conservatism
Now, we’ll talk about the going concern assumption. Here, you must assume that your business will be around for a long time and stay stable. It will help put off costs that will be counted in later accounting periods. The other idea is called “conservatism.” In this idea, expenses or income are only made when they are possible. For example, buying any asset or stock that is needed for daily business. But expenses should be written down sooner if there is a chance that they will happen. It will show more money going out than coming in. So, it would be a conservative financial statement, and the person would have to pay fewer taxes.
Materiality and Economic Entity
Also, a business is a separate economic entity, so this assumption says you shouldn’t mix business and personal money. In the company’s financial statements, there should be business-related transactions. You shouldn’t put personal expenses in your business books. If you follow this idea, it will keep you out of tough situations or trouble with the law. Another thing a bookkeeper should know is the idea of “materiality.” This means that any transaction no matter how small, that affects your financial decisions should be recorded. It would help you make sure everything in the business is in order.
Concept and Accounting Equation Matching
Also, the matching concept says that you should record expenses and income related to that income at the same time in order to keep track of any link between income and spending. An accounting equation would help you figure out how a transaction is recorded by the software. Assets equal liabilities plus owners’ equity.
The Idea of the Accounting Period
The last idea is the accounting period, which means that all financial transactions that happened during a certain time period should be recorded at the time of issue. This will help you understand the cash flow statement, balance sheet, and income statement.
In a nutshell, a small business owner should know about accruals, consistency, going concern, conservatism, economic entity, materiality, matching, the accounting equation, and the last accounting period in order to make better financial decisions.
What does the accounting period concept entail?
The accounting period concept specifies that all financial transactions occurring within a certain time period should be recorded in the corresponding accounting period. It facilitates the preparation of financial statements, such as the cash flow statement, balance sheet, and income statement, to provide an accurate representation of the business’s financial activities.
Define the accounting equation and its components?
The accounting equation is Assets = Liabilities + Owners’ Equity. It represents the fundamental equation in double-entry bookkeeping, where assets owned by a business are equal to the combination of its liabilities (debts or obligations) and owners’ equity (the owners’ investment and retained earnings).
What does materiality mean in accounting?
Materiality in accounting means that any transaction, no matter how small, that has a significant impact on financial decision-making should be recorded. It ensures that all relevant information is captured and considered when evaluating the business’s financial position and performance.
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