Whether you hired an accountant or not, you should understand the basics of accounting concepts as a business owner. Accounting runs on the following concepts.
What Are Accounting Concepts?
Accounting concepts are like general guidelines to use in certain accounting situations or when an issue occurs. Applying these concepts to accounting work ensures that financial statements are both informative and reliable. They are typically known as Generally Accepted Accounting Principles (GAAP).
These principles and standards are deemed acceptable for creating financial statements. GAAP helps create uniformity and consistency of financial reporting that companies should be adhering to regardless of size or industry.
Some of the concept names and how they are followed vary slightly from accountant to accountant. The following concepts are important to understand.
Accounting Year Concept: An accounting year is the time period in which your business completes the accounting process. This can be considered a quarterly, monthly, or annual period.
Accruals Concept: The accruals concept means that revenue is recognized when it is earned, while expenses are recognized when the assets are consumed. Auditors only certify business financial statements that have been prepared under this concept.
Business Entity Concept: Business owners should keep their finances separate from the business itself.
Cost Concept: This concept involves recording the fixed assets of your business on the basis of your original cost during the first year of accounting. Assets minus depreciation are recorded, and rises and falls in the market are ignored.
Going Concern Concept: Businesses are expected to continue running for a long period of time. They should carry out their commitments and obligations unless they are forced to stop functioning and liquidate their assets at “fire-sale” prices.
Matching Concept: This accounting principle requires that for every entry of revenue recorded in the same period, an equal expense entry should be recorded. The purpose is that no deferral of expense recognition is shown in later reporting periods.
Materiality Concept: Record transactions when the failure to record them alters the company’s financial statements. Fully represent your finances and cash flow by following this concept.
Learn More About Accounting Concepts
Our professionals at PL Consulting and Bookkeeping Plus offer diverse services related to all your financial matters. We can help you with any questions or concerns regarding accounting.
The benefit of working with PL Consulting is that you do not have to choose between different companies if you need a bookkeeper and accountant. Our company is proficient in both with a focus on small to midsize businesses. We are your go-to resource for bookkeeping and accounting services.
Our team serves the Baltimore, Maryland area and beyond. We customize our services to each client. Your ideas are unique to your business, and we understand that. We help you maintain good records and financial statements.
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