Accounting Fundamentals

Accounting Fundamentals

Table of Contents

The fundamental concepts of accounting form the backbone of financial reporting and analysis. Below are the key principles that define how accounting works:

  1. Accounting Equation:
    The foundation of accounting is the equation Assets = Liabilities + Equity. This reflects the double-entry bookkeeping system, where every transaction impacts at least two accounts to keep the equation balanced.

  2. Accrual Principle:
    Transactions are recorded when they occur, not necessarily when cash changes hands. This ensures financial statements accurately represent a business’s economic activities, regardless of payment timing.

  3. Matching Principle:
    Expenses are recorded in the same period as the revenues they help generate. This principle provides a clearer picture of profitability by aligning costs with related income.

  4. Historical Cost:
    Assets are recorded at their original purchase price rather than their current market value. This promotes consistency and reliability in financial reporting over time.

  5. Going Concern Assumption:
    Financial statements assume the business will continue operating indefinitely unless there’s evidence otherwise. This affects how assets and liabilities are valued and reported.

  6. Financial Statements:
    Accounting revolves around three core statements:

    • Balance Sheet: A snapshot of a company’s assets, liabilities, and equity at a specific point in time.
    • Income Statement: Shows revenues, expenses, and profit or loss over a period.
    • Cash Flow Statement: Tracks cash inflows and outflows from operating, investing, and financing activities.

  7. Accounting Standards:
    Frameworks like GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards) provide rules to ensure financial reports are consistent, comparable, and transparent across businesses.

These concepts collectively ensure that financial information is accurate, reliable, and useful for stakeholders—such as investors, creditors, and management—in making informed decisions.

Tags :

Related Posts

Lease Accounting

Lease Accounting

Key Points Lease accounting under IFRS, specifically IFRS 16, requires recognizing most leases on the balance sheet, impacting financial reporting. Key calculations involve measuring lease liabilities and right-of-use assets, using inputs like future payments and discount rates. The evidence leans toward a comprehensive list of inputs, including payment details, costs, and asset life, though complexity arises with variable terms. Overview of Lease Accounting Under IFRS Lease accounting under IFRS is governed by IFRS 16, effective since 2019, which changed how companies report leases. It requires lessees to recognize assets and liabilities for leases over 12 months, unless the asset is of low value, moving away from previous off-balance sheet treatment for operating leases. This shift aims for transparency, showing lease obligations clearly on financial statements.

Read More