Understanding the Basic Concepts of Accounting

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Business operations cannot be separated from the existence of basic accounting concepts as the foundation in the process of recording, summarizing, categorizing, processing and presenting transaction data. Of course, the accurate basic accounting equation is also reflected in this concept. Namely, the existence of assets, liabilities, and capital.

When you keep records, it is very important that you know all the specifications of debit and credit positions so that the basic accounting equation can balance. to be considered as a comprehensive financial statement. But before that, it is necessary to develop basic accounting concepts.

Accounting mistakes can have a big impact on a company's finances and lead to bad business decisions if people don't understand the basics of accounting.

What are the Basic Concepts of Accounting?

Basically, concept accountancy is a set of ground rules, assumptions, and situations that can be used in most situations. Forms the basis for creating financial reports in a universal format and should be followed by every organization in the same way.

What are the Basic Concepts of Accounting

Based on this description, some of the objectives of the basic accounting concepts and their application in financial statements are as follows:

  1. Ensuring that financial reports are prepared consistently and uniformly;
  2. become a standard guideline for all accountants to use in compiling and storing transaction data and other important financial information; and
  3. serve as guiding principles or basic assumptions that must be followed by all business entities in order to provide complete and comparable financial information.

List of Basic Accounting Concepts

The basic concepts of accounting may vary widely based on the applicable legal structure. The basic concept of accounting itself is related to the GAAP framework.

The FASB (Financial Accounting Standards Board) is a framework that establishes the rules, methods, principles and best practices for financial accounting and reporting of company transactions that are directly evaluated by the FASB (Financial Accounting Standards Board).

Consistency, transparency, objectivity, materiality and full disclosure are all aspects of the GAAP framework that are addressed in the basic concepts of accounting. The following are the basic concepts of accounting in financial statements according to GAAP.

The concept of accruals in financial reporting says that each account in the statement of financial position must be recorded and recognized when transactions occur, not when cash enters or leaves the organization.

An organization's statement of financial situation should reflect the true value of the business.

Accrual Concept

The concept of accruals in financial reporting argues that each account in the statement of financial position should be reported and recognized when transactions occur and not when cash is received or disbursed by the organization. An organization's financial situation report must accurately show how much the company's assets are actually valued.

Conservatism Concept

The concept of conservatism is a basic accounting concept which emphasizes that every company or organization must record obligations and costs for expenses that will be incurred as soon as possible.

On the other hand, conservatism doesn't take into account how the business can make money or how revenue can be earned in the future.

However, the application of the concept of conservatism has implications for low recording of profits or even losses in the financial statements which creates a disparity between the financial statements and the financial condition of the entity that should be.

The Basic Concept of Conservatism

Consistency Concept

Consistency in preparing financial concepts is using the same rules and accounting procedures for every financial transaction. This is to avoid user misunderstandings and make financial reports easier to read.

Cost Concept

This basic accounting rule says that all costs of purchasing assets, liabilities, or equity must be recorded as if you were paid at the time of the transaction.

This also explains why market prices and inflation rates cannot be used to change cost values. This concept As a result, the application of the cost concept causes the value of assets in the balance sheet to become irrelevant in the long term.

Economic Entity Concept

This concept says that every organization is a distinct entity from the owner of the organization. Therefore, the owners of the organization need to separate their personal assets and liabilities, which may not be combined with the assets and liabilities of the organization.

An organization's financial statements may be misleading if there is no clear distinction between personal and organizational assets and liabilities.

Full Disclosure Concept

The basic concept of accounting in the following financial statements is the concept of complete transparency. The main point of this idea is that an organization's financial reports should include all the important information about its finances.

It tries to ensure that everyone with an interest in the organization can study and assess financial facts and choose the actions or policies to be implemented.

Going Concern concept

A “going concern” is a business concept that says an organization will continue to run normally and generate money for shareholders unless something unforeseen happens.

This means that the organization does not have to close, and some costs may not be paid immediately because it is considered that the organization is still able to work and cover these costs.

Going Concern concept

Matching Concept

The application of the matching concept to financial statements can be observed in the income statement. The matching concept holds that income must be matched with expenses at the same time.

Under the matching concept, all costs related to inventory are included in cost of goods sold and expensed when goods are sold. While this is happening, the consumption report will also contain expenses that are not related to income.

Finance Unit Concept

Any business that uses the idea of a financial unit (also called a monetary unit) needs to know how to track monetary transactions.

This is to expedite purchase documentation and prevent organizations from recording excessive amounts owed. Because information is written in units of currency values, it is easier to measure and understand financial reports.

Basic Concepts of Accounting Periods

Periodically, such as every three months, six months, nine months, or a year, financial information about the company must be provided.

The accounting period refers to the frequency of reporting of financial data. By regularly preparing these reports, the organization can ensure that future plans and policies are in line with the basic ideas of accounting, as follows:

Money Value Measurement

Financial transactions must be measurable in certain monetary units. Likewise with the assets, liabilities, and capital owned in the company. From this valuation with the value of money, the entire value of the company's assets can be estimated.

Journal Accounting Software Meets the Concept of Accounting Standards

The basic ideas of accounting listed above are indeed important, but you also need to know that accounting is a financial recording concept that includes a collection of data that must be grouped according to financial reports or data needed by internal and external parties of the company.

Online journal accounting software has recently been developed as a simple and effective accounting solution to avoid recording errors and reduce the danger of human error due to entering transactions repeatedly in various types of reports.

Journal Accounting Software

There is no need to record the same transaction more than once when using a journal. Depending on the type of financial report that needs to be made, the journal will automatically place each required financial transaction into the proper category.

Other ways that journals can help with finances are by automatically calculating taxes, creating invoices, and tracking stock.

FAQs

Below we have summarized some frequently asked questions about accounting, as follows:

What are the benefits and uses of accounting?

Accounting is useful for obtaining company financial information. This is because companies should have systematic and chronological transaction records. These notes are useful for preparing a final report which can later provide information about the company's profits and losses from a financial standpoint.

Conclusion

Error accountancy can have a major impact on company finances if people do not understand the basics of accounting. Accounting concepts are a set of basic rules, assumptions and situations that can be used in most situations.

The accruals concept in financial reporting argues that each account in the statement of financial position must be reported and recognized when transactions occur, not when cash is received or disbursed by the organization. An organization's financial situation report must accurately show how much the company's assets are actually valued.

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