Accounting is extremely popular as the language of business language. Through this language, it is easy to analyze the financial condition and performance of the business. However, understand this language is not a cakewalk. There are many people simply can’t understand the stats and figures. But there are people who are aware of this concept deeply and know the basic accounting assumptions rule.
This financial information makes sense with the basic accounting principle and concept. The concepts are known as GAAP that stands for Generally Accepted Accounting Principles. These concept and principles are used as a foundation of the accounting.
They help in understanding the basic accounting equation reading the accounting information and financial statements without making any basic accounting assumptions about the meaning of a figure or stats.
Basic Accounting Principles and Concepts
GAAP helps in understanding the standard rules and concept of the accounting world. It is important to learn and understand the concepts to use them in real life. Here is a list of principles and concepts that must be clear to businessmen to run a steady growing business. Thus this includes the basic accounting terms that are excessively used in business world.
The entity is different for the different field. In the field of business, the entity has a completely different meaning that is separated from the business itself. An owner is a separate entity as compared to the product. Even the partnership or proprietorships are different. The simple meaning of this word in basic finance and accounting term is that the business account must be separated from the owner’s accounts.
The transactions that are done for the personal use must be kept independently from the business accounting book. Well, this rule is implied unless the transaction made for personal use is done from the business account.
It is essential to express the financial accounting details in the terms of transitory details. This is the main cause of why the financial statement and utility bills only show the half picture of the commerce. The small issues play a vital role in the operation and financial security of the business like the strike or health issues which is related to the basic accounting assumptions. These issues are not shown in the financial statement that prevents in giving out a bigger and proper picture of the firm.
The price at which an asset is bought is the actual price by which entry will be made in the records. You can’t be depended on the market value of the product as it will change with time and the market value. Hence, it is important to maintain a proper record with the amount you paid for the product. However, the cost model recognises criticise price and hence the amount of criticising value was removed from the actual price. The net value is hence recorded by removing the operation cost from the basic accounting and finance.
This is the basic accounting equation concept that depends on:
Resources = Accountability + Impartiality
Here resources are owned by the company that is used for the production or manufacturing process. Accountability is the amount of money that company is indebted to the investor against the resources. Impartiality is the main difference between the accountability and resources. It basically shows what is owed by the owner of the company. Hence the main aim is to keep these basic accounting terms stable no matter how the transactions are made. The equations increase on both side and vice versa.
As it might be cleared by the name, it is talking about some time span. The main question is in what regards is it saying time period? Well, it is talking about the time taken for the preparation of an entity report. The format followed by the company depends on the decision of the owner. It can be the natural year (1 Jan – 31 Dec) or Fiscal year (1 Mar – 28 Feb). If an owner feels that it must be quarterly or monthly then that format will be followed.
Profits are basically earned with the help of resources and liabilities. However, it earning is done when the product is sold to the customer at a reasonable price. It will be recorded at the time of selling and not before it. The bestowed contract time is not recorded in it. The main thing to know is that the cost of production get divided over time and you can’t be sure how much money was invested in the manufacturing. Hence the basic accounting assumptions are done but the actual cost is added later on.
If you are using a method to maintain a record then you must follow the same concept for the future endeavour too. This will guarantee that if any changes in the financial statement are done then it was due to the change in the operation rather than the accounting entries. It is easy for you to keep a track on things and what needs to be done in case the condition deteriorates.
To ensure that the income is not overstated at any time, you need to record the expenses and revenues at the same time. For instance, if you used 30,000 dollars for buying the raw material then enter it in the record during the time of representing revenue. However, it is an easy way to maintain the chart of the revenue and expenses. You will also be able to know the profit and loss of you expenses with the little help of basic accounting and finances.
Hence, with the help of these principles and concept, it is easy to read, organise and link the statements of all the finances with utter precision and accuracy. Well, the traditional methods may need a lot of manual work. But it is the best way to obtain an accurate result. And in the case of any indecision, you can always try to stumble as a caution.