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Basic Accounting Principles

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15 views

Basic Accounting Principles

Uploaded by

Abu Roman Roman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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The fundamentals of accounting form the basis for understanding how financial information is

recorded, summarized, and reported. These fundamentals can be grouped into key principles,
assumptions, and concepts that guide the accounting process. Here are the primary elements:

1. Basic Accounting Principles

These are the foundational rules and guidelines that govern the field of accounting:

 Revenue Recognition Principle: Revenue is recognized when it is earned and realized


or realizable, regardless of when the cash is received.
 Matching Principle: Expenses should be matched with the revenues they help to
generate within the same accounting period.
 Historical Cost Principle: Assets should be recorded and reported at their original
purchase cost.
 Full Disclosure Principle: Financial statements should include all information necessary
to understand the financial condition of the business.
 Objectivity Principle: Financial statements should be based on objective evidence, such
as invoices and receipts.

2. Accounting Assumptions

These are underlying assumptions that provide a foundation for the accounting process:

 Economic Entity Assumption: The activities of the business are separate from those of
its owners or other entities.
 Monetary Unit Assumption: Only transactions that can be expressed in monetary terms
are recorded.
 Time Period Assumption: The life of a business can be divided into time periods, such
as months or years, for reporting purposes.
 Going Concern Assumption: The business is assumed to continue operating
indefinitely, unless there is evidence to the contrary.

3. Accounting Concepts

These concepts provide a framework for accounting practices:

 Accrual Basis Accounting: Transactions are recorded when they occur, not necessarily
when cash changes hands.
 Conservatism: When faced with uncertainty, accountants should choose the option that
results in lower net income or asset value.
 Consistency: Once a method is adopted, it should be used consistently from period to
period.
 Materiality: The significance of an item should be considered when deciding whether to
include it in the financial statements.
4. Financial Statements

These are the primary outputs of the accounting process, providing a summary of financial
performance and position:

 Income Statement: Shows the company’s revenues and expenses over a period,
culminating in net income or loss.
 Balance Sheet: Displays the company’s assets, liabilities, and equity at a specific point
in time.
 Cash Flow Statement: Summarizes the company’s cash inflows and outflows from
operating, investing, and financing activities.
 Statement of Changes in Equity: Reports changes in the equity portion of the balance
sheet during an accounting period.

5. Double-Entry System

This is the cornerstone of accounting, where every transaction affects at least two accounts,
ensuring the accounting equation (Assets = Liabilities + Equity) remains balanced.

6. Debits and Credits

These are the two sides of every transaction in the double-entry system. Debits increase asset or
expense accounts and decrease liability, equity, or revenue accounts. Credits do the opposite.

7. The Accounting Cycle

This is the series of steps followed during each accounting period to record transactions and
prepare financial statements:

1. Identify Transactions: Recognize business transactions that affect financial statements.


2. Journalize Transactions: Record transactions in the journal.
3. Post to Ledger: Transfer journal entries to the general ledger.
4. Prepare Trial Balance: Ensure debits equal credits in the ledger.
5. Adjust Entries: Make necessary adjusting entries for accrued and deferred items.
6. Prepare Financial Statements: Generate financial statements from the adjusted trial
balance.
7. Close Accounts: Close temporary accounts to retained earnings.
8. Prepare Post-Closing Trial Balance: Ensure all temporary accounts are closed and the
ledger is ready for the next period.

Understanding these fundamentals helps ensure that financial information is accurate, reliable,
and useful for decision-making by stakeholders.

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