To understand how the debit and credit system functions within an organisational set-up, one must become familiar with the accounting concepts they are based on. Such concepts serve as a mechanism on which accounting transactions and principles are formulated. Being familiar with basic accounting concepts helps to identify, measure, decode and transmit information related to the economy more effectively. In turn, it helps businesses to make an informed decision regarding their venture and related accounts.
Essentially, basic accounting concepts can be defined as a set of accounting rules, principles and assumptions. Such rules serve as a means to record business transactions and are extensively used by financial experts and practitioners to prepare financial statements and accounts. Typically, these rules help to form a practical conceptual framework in accounting.
In a broader sense, the basic accounting concepts can be divided into 9 types. They are discussed below –
The said concepts state that a business and its owner must be treated as a separate entity. Based on it, the books of accounts are treated from the perspective of the business and not its owner.
In this business entity concept, owners are regarded as the firm’s creditors, responsible for replenishing the share capital of the firm. The application of this concept helps to ascertain the performance of the business and its owners separately.
The said concept elaborates that a business venture must be divided into segments like – monthly, quarterly, half-yearly or annually according to the calendar year or fiscal year. In other words, a business should choose a definite period to be considered its accounting cycle. Based on the selected period, the performance of the business will be gauged.
This particular basic accounting concept establishes a framework wherein, income and expenditure are recorded in the accounting year it is incurred and not when it is paid or received. The accrual concept is based on the idea that net income results from transactions that impact owner’s equity within a given period. Typically, such a change is not necessarily similar to the change in a firm’s cash position. Resultantly, accrual concept proves useful to measure income effectively.
As per the cost concept, the original price of fixed assets is recorded in the first accounting year. It must be noted that this concept does not account for an increase or decrease in the market price of fixed assets. Also, the cost may change based on the depreciation value, and also lead to a decrease in the profit of each accounting period.
Under this basic accounting concept, the revenue of a business is recognised after the sale. In simple words, revenue is realised when services are rendered, or goods are delivered to the buyer. It must be noted that a fee paid or advance forwarded is not recognised as a profit until the goods have been delivered to the purchaser.
This particular concept states that the transactions which can be expressed in monetary terms can be recorded in books of accounts. Nevertheless, firms are also required to keep a separate record on non-monetary transactions.
As per this basic accounting concept, every credit corresponds with a debit. The dual aspect concept is also known as the accounting equation and is expressed as Assets = Liabilities + Owners Equity.
It states that profits are revenues that are recorded in a firm’s balance sheet only when they are realised or are assured to be released soon. Conversely, liabilities are recorded even when there is a slight chance of incurring them.
The said concept operates based on the assumption that a business will continue its operation for a long time in the future. It is assumed that the management will not liquidate the business or will be pressured to discontinue it in the near future.
Under the matching concept, a company recognises both its expenses and revenue in the same accounting cycle. The concept states that for every revenue entry recorded an equal expense entry must be made to estimate the profit or loss of an accounting period accurately.
Besides becoming familiar with the basic accounting concepts, business owners should also find out details about the different financing options available to them. For instance, they can raise funds to meet their firm’s working capital requirements by opting for invoice discounting services.
At KredX, we offer integrated cash flow solutions to help businesses maintain their day-to-day operational activities. You can benefit from our invoice discounting solutions and optimise your operation to a great extent.