The basic accounting concepts and principles of accounting help in the financial management of a business. Accounting is the process of recording the financial transactions of a business. This includes processes such as summarizing, analyzing, and reporting these financial transactions. Moreover, the accountants present these reports to oversight agencies, regulators, and tax collection entities. Regardless of the size of a business, accounting concepts and principles are necessary since they help in cost planning, decision making, and the measurement of the economic performance of the business. This includes the implementation of the two major types of accounting. These are managerial accounting and cost accounting.
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THE BASIC ACCOUNTING CONCEPTS IN BUSINESS.
There are five basic accounting concepts that a business needs to employ. Firstly the accrual concept in which a business recognizes revenue. This I therefore in terms of profits and loss based on the cash received from the customers and the cash paid to the suppliers. Secondly, the economic entity concept states that the transactions of a business are separate from personal transactions hence treated as separate entities. Thirdly, the going concern concept assumes that the business remains operational into the future hence recognizes future revenues and expenses. Fourthly, the matching concept records that the business recognizes both the expenses and revenues at the same time. Lastly, the materiality concept entails the recording of relatively small transactions thus providing a comprehensive financial report.
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THE MAJOR PRINCIPLES OF ACCOUNTING IN FINANCIAL MANAGEMENT
The revenue principle states that the business earns its revenue and records it at the point of sale. Therefore it does not recognize the good still in store as revenues. The expense principle recognizes that the expenses of the business occur only when they accept goods and services from other business entities. Therefore, the business does not recognize expected expenses. There is also the matching principle in which each item from the revenue matches another item in the expenses when recording in the books of accounts. This also applies to the basic accounting concepts. Moreover, there is the cost principle which states that a business should use the historical cost of an item when recording in the books and not the resell cost. Lastly, the objectivity principle which states that the business should only use factual verifiable data in the books.
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