Comprehending these basic concepts can help you make better financial decisions for daily operations and in the long run for the bookkeepers. Some basic concepts are mentioned below. The basic concepts can be listed for instance, accruals, consistency, going concern assumption, conservatism, economic entity, matching, materiality, accounting equation and finally the accounting period.
First, to elaborate accruals; there are two principles one is accruals basis and other is cash basis accounting. Direct debit benefits SMEs by providing automated payments and collecting receivables, while keeping track of their expenses and incomes in real-time. This helps SMEs to better manage their cash flow and align their expenses and incomes, as required in accrual accounting. However, cash basis; financial statements of the company incur expenses and income when are paid or received in liquidity form as cash. Here, we do not record as accounts receivable. Instead, invoice or amount is paid at that time.
In addition, a bookkeeper also should understand the consistency principle; it intensifies that an accounting method you choose whether its cash or accrual basis, you should stick to the method chosen. This will help you to track your venture or small business performance in different accounting periods. To pay the taxes; of you want to change the method you need IRS approval to pay taxes.
Going Concern and Conservatism
Now, the going concern assumption; here you must assume about your business to live longer in the long run an in a stable condition. It will help to defer expenses to recognize in the future accounting periods. Other concept is conservatism; in this concept revenues are incurred when there is possibility of that expense or revenue. For instance, purchasing any asset or inventory for the daily operations. However, expenses should be recorded earlier if there is possibility of that expenses will happen. It will overstate the expenses than cash inflows. Consequently, would make it a conservative financial statement and would have to pay less taxes.
Economic Entity & Materiality
Furthermore, economic entity; this assumption narrates that you should not mix business and personal funds together. There should be business related transactions in the financial statements of the company. You should not record personal expenses in business records. By following this concept, it will help you from difficult situations or legal trouble. Other concept a bookkeeper should know that is materiality; records any transaction that affects your financial decisions, even its minor transaction. It would assist you to keep check and balance of everything in the business.
Matching Concept & Accounting Equation
Moreover, the matching concept; it says that you should record expenses and revenue related to that revenue at that time to track any relationship between revenue and purchasing. Accounting equation would help you understand how software records a transaction. equation is Assets=liabilities owners’ equity.
Accounting Period concept
Final concept is accounting period- financial transactions related to time-period should be included at the time of issue. This will help understand the income statement, balance sheet and statement of the cash flows.
In a nutshell, a small business owner should know these basic accounting concepts to take better financial decisions for small business are accruals, consistency, going concern, conservatism, economic entity, materiality, matching, accounting equation and in last accounting period.