Learning about accounting concepts such as revenue, expenses, and assets can be a great way to get started in the field. These principles can help you manage your own money, start your own business, or teach others about this discipline.
There are two types of accounting: accounting concepts and principles. In this article, we’ll go over some basic accounting concepts and know about the After Bcom course in Ahmedabad.
What exactly are accounting concepts?
Accounting concepts are the ideas, components, and terms that comprise the accounting, finance, and economic worlds. Individuals, businesses, and organisations can use these terms to record all of their financial information, including transactions. Accountants use these ideas when preparing financial reports and other documents for individuals and businesses.
Knowing common accounting concepts and how to apply them is essential for an accountant to interpret financial situations and track money properly. Learning about these concepts can also assist business owners in organising their business records, preparing for audits, and ensuring they earn enough revenue to sustain operations. Even the average person can benefit from understanding accounting concepts because it can help them save money, avoid debt, keep accurate financial records, and make wise financial decisions.
Accounting concepts and accounting principles are not the same thing.
Accounting concepts and accounting principles are both critical components of accounting because they establish a universal framework for discussing specific financial situations, rules, documents, and theories. While some people use these terms interchangeably, accounting concepts can be thought of as what accountants do and accounting principles as how they do it.
Accounting principles, also known as “generally accepted accounting principles” (GAAP), are widely accepted accounting laws or standards. These rules are made by groups like the Financial Accounting Standards Board for use by accountants all over the world.
A business can ensure compliance with the law and demonstrate economic growth to external parties by adhering to accounting principles. These principles include accrual, conservatism, and consistency.
Accounting concepts are the fundamental components of accounting. Accountants may apply these topics, terms, or theories to different types of money, transactions, and economic functions.
Accounting concepts are used by accountants to understand and explain a company’s operations, cash flows, and financial performance. Accounting, like most other fields, communicates using concepts as its own kind of language.
Accounting encompasses a wide range of disciplines. Examine the following seven concepts to gain a basic understanding of accounting:
Revenue is the total amount of money received or receivable from customers for services and products by a business. Income is a company’s net profit, or the money left over after deducting expenses and taxes from revenue.
Expenses are the costs incurred by a business in order to generate revenue. Supply and material costs, rent, advertising, employee salaries, repairs, and taxes are examples of such expenses. A restaurant, for example, may purchase ingredients from a supplier on a regular basis in order to run their business. In order to earn money, a company’s expenses must be lower than its revenue to generate profit.
Assets are resources that a company owns that provide it with financial benefits. A company’s assets can be calculated by adding its liabilities to its equity. There are two types of assets: current and noncurrent:
- Current assets include cash, checks, receivables, inventory for sale, and prepaid expenses. These are examples of resources that will be used by the business within a year.
- Non-current or fixed assets include long-term assets that can provide a company with benefits for more than one year, such as stocks and bonds, land, buildings, equipment, and trademarks.
Liabilities are economic obligations owed by a company to other organisations, such as lenders and creditors. Liabilities, like assets can be:
- Accounts payable, short-term loans, long-term loan instalments, and tax obligations are all current liabilities, which are payments that must be made this year.
- Non-current liabilities include long-term bonds, mortgages, and deferred tax obligations, which are examples of payments that are not due within the year.
Capital is defined as anything that adds value or benefits to a business owner, such as assets, machinery, real estate, inventory, and patents. While cash is a type of capital, the term “capital” is usually used to refer to investments that generate wealth for a company. Here are a few examples of capital:
- Working capital is calculated by subtracting current liabilities from current assets. Working capital refers to liquid capital assets, or cash assets, that a company uses for day-to-day operations. In the short term, working capital is used to pay debts and bills that are due this year.
- Equity capital refers to an owner’s stake or share in a company or any asset that they own. If a company liquidated or sold all of its assets for cash and paid off all of its liabilities and debts, the value that each shareholder would receive is their equity. The money that shareholders invest in a company is referred to as its equity capital.
- Debt Capital: Businesses can obtain debt capital by obtaining loans and bonds from banks and private or public sector organisations. Debt capital, because it provides a large sum of money all at once, can allow a company to invest in its future and expand.
An account is a type of transaction, such as a cash transaction or a sales transaction. A general ledger, an accounting book that stores and organises transactions, is used by businesses to record accounts. Customers owe money to a business in exchange for goods and services, which is referred to as accounts receivable. People and businesses who have bought goods and services from businesses have accounts payable. These are the money that the business owes them.
These are the documents that detail a company’s or an individual’s transactions. The following are some examples of financial statements and their definitions:
- An income statement, also known as a profit-and-loss statement, is a document that provides information about a company’s financial performance by reporting revenues, costs, and expenses over a specific time period.
- The balance sheet is a financial statement that details a company’s assets, liabilities, and equity.
- A cash flow statement is a statement that shows how much money a company earned and how much money it spent.