Basic Accounting Concepts

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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.