Basic Accounting Concepts
Accounting is the language of business. Financial accounting generates information for external decision makers. Managerial accounting generates information for internal decision makers.
Events that change the financial position of a business and can be measured are called transactions. In accounting, a material transaction is one that is significant enough to be recorded.
Any party to whom a business owes money is known as a creditor. A creditor might be interested in the financial status of a business to determine whether the business will be able to pay back a loan.
Key Concepts and Assumptions of Accounting:
-
Economic entity assumption: businesses are separable from one another and may be analyzed individually
-
Cost principle: the assets of a business should be recorded at their actual price
-
Going concern assumption: a business entity will continue to operate indefinitely
-
Monetary unit assumption: the value of a dollar is stable and the items on a financial statement should be measured in dollars
-
Consistency principle: a business should use the same procedures and methods in every accounting period
-
Disclosure principle: financial statements should deliver sufficient information for external parties to make informed judgments
-
Conservatism principle: when in doubt, it is better to report an expense than an asset.