Accounting concepts every business should know

Posted: March 25, 2013 in Uncategorized

I think every business student should have a solid grasp of key accounting principles, no matter what major they are pursuing. Such an understanding not only aids understanding about essential business operations and how they relate to profitability and long-run success, but they are also valuable in everyday life!

Here are some important ones:

+ Accrual Basis: the accounting process whereby revenues are recorded as earned, while expenses are recorded as incurred.

+ Cash Basis: revenues are recorded when cash is received, and records expenses when cash is paid. For a business invoicing for an item sold, or work done, the corresponding amount will not appear in the books until payment is received – and similarly, debts owed by the business will not appear until they have been paid.

+ Accrued Revenues: revenues that have been earned and recorded, but are yet to be collected. These become receivables.

+ Accrued Expenses: Unpaid expenses that have already been incurred. These become payables.

+ Book Value: Cost minus accumulated depreciation. This is the net amount at which an asset is reported on the balance sheet.

+ Adjusting Process: updating balances at the end of an accounting period in order to reflect the true balance for revenues and expenses.

+ Adjusted Trial Balance: A trial balance prepared after adjusting entries have been prepared and posted to the ledger.

+ Depreciation: the allocation of cost of a long term asset over its useful life. Straight-line depreciation is a common method.

+ Fiscal year: A one-year accounting period that does not correspond with the calendar year. Differs based on industry.

+ Matching Principle: match revenues with expenses and record them simultaneously within the same accounting period.

+ Periodicity Assumption: accounting assumption that breaks the business cycle into periodic intervals, alas the income statement.

+ Prepaid Expenses: goods/services that are purchased before their consumption. They are assets until consumed.

+ Unearned Revenue: Revenue that has been collected in advance of providing a good/service. A liability until earned.

+ Asset: an economic resource that is owned by a company.

+ Liability: an obligation that arises from past transactions or events.

 

These are just a few, but its a great place to get started. Check out this link for a great resource that gives fundamental concepts and interactive learning aids.

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