Basics Of Accounting – Terminology, Principles, And Concepts

Basics Of Accounting – Terminology, Principles, And Concepts

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Jaya
Jaya Sharma
Senior Executive Content
Updated on Feb 16, 2024 18:47 IST

Accounting existed in practice for many centuries but it was developed into a profession by Luca Pacioli who is considered to be the father of accounting. By the 19th century, it had taken the form of modern accounting.

basics of accounting In this article, we will be discussing the basics of accounting to understand its concepts and principles in detail. Let us get started.

Table of Contents

What is accounting?

Accounting is the process of measuring and processing finance-related information. It measures the results of the economic activities of an organization for the use of stakeholders. In the current times, accounting is facilitated by accounting organizations. The general accounting principles are governed by GAAP and IFRS. Accounting follows two systems, including the traditional bookkeeping system and the double-entry system.

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How to learn the basics of accounting?

If you want to learn the accounting basics, you need to understand the direction of starting this journey. First, let us discuss the flow that you should follow to learn the basics of accounting.

Step 1: Learn the Basic Jargon

The first step in learning accounting basics is to be well-versed in its jargon. Let us now take a look at the important accounting terminologies that are frequently used. 

  1. Accounting Period: It is the time period in which accounting functions are performed. It is an important timeline since any financial information is assessed within this time period. 
  2. Accounts Payable (AP): It is a short-term liability on the balance sheet that indicates the money that any business owes to its vendors. These are the vendors that provide
  3. Accounts Receivable (A/R or AR): This refers to an item mentioned in the general ledger that the customer owes to a business for purchasing goods and services on credit.  services and products on credit. 
  4. Accrual Basis of Accounting: This is the method to record the income as well as expenses when they are generated. In such cases, revenue is recorded when it is earned rather than when money changes hands. 
  5. Asset: It is a resource owned by a business that has the potential to produce positive economic value. Assets can be tangible or intangible in nature, and these can be converted into cash.
  6. Balance sheet: It is one of the financial statements of the company that includes details related to assets, liabilities, and shareholder equity. Through this statement, the company can identify what it owes and what it owns. Assets= Liabilities+ Equity is the foundation of the balance sheet. 
  7. Cash flow statement: This is also known as the statement of cash flows. it is another financial statement that displays changes in balance sheet accounts and income affecting cash and cash equivalents. 
  8. Financial statements: These are the documents that record financial activities and business information in a structured manner. Balance sheets, income statements, statements of equity and cash flow statements are different types of financial statements. 
  9. Income statement: This is also known as the profit and loss statement which records a company’s revenue and expenses in an accounting period. Investors and management can assess the money made and lost by the company in an accounting period. 
  10. Liabilities: These are the debts that a business owes to creditors outside the organization. These are settled over time in the form of goods, services, and money. 

Step 2: Types of Accounting

There are three main types of accounting including the following:

  1. Cost accounting: This type of accounting deals with recording, analyzing, classifying, allocating, and summarizing costs. In cost accounting, input cost associated with each production step is recorded along with costs incurred in equipment and labour acquisition. 
  2. Management accounting: It deals with analyzing business-related financial information for internal purposes. Through management accounting, companies can take business decisions that are based on forecasting and trends.  
  3. Financial accounting: In this branch of accounting, transactions related to business operations are recorded, summarized, and reported over an accounting period. The data provided through financial accounting is available to the public as well as the company. 

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Step 3: Thorough Understanding of Accounting Principles

Those who want to learn accounting basics must have strong fundamentals of the following principles of accounting

  • Accrual principle: It mandates the recording of business transactions in the period during which they have occurred. 
  • Consistency principle: An organization should stick to the same accounting method of reporting and documentation throughout. 
  • Conservatism principle: Expenses and liabilities must be recognized at early stages regardless of the uncertainty about the outcome. 
  • Cost principle: Initial value of an acquired asset should be recorded in the financial reports of a business. This is done even if the asset’s value does not improve over time.
  • Economic entity principle: Business should be treated as a separate legal and financial entity from its owner. 
  • Matching principle: A business must report its revenues and expenses simultaneously since these are matched on income statements for an accounting period. 
  • Materiality principle: A company should record an item that may impact the investor’s decision-making process in financial statements. 
  • Full disclosure principle: Every entity-related information must be recorded in a financial statement as it may influence a reader’s understanding of the statement. 
  • Going concern principle: A company must fulfill its financial obligation, complete its plans and use existing assets.
  • Monetary unit principle: Here, the concept of money measurement is followed. Business transactions must be recorded only when they are expressable in currency.
  • Reliability principle: It is followed to ensure the reliability of business activities, transactions, and events in a financial statement.
  • Time period principle: A company must report the financial results of its business activities in a standard period of time.
  • Revenue recognition principle: As followed in GAAP, this principle states that the revenue must be recognized when a critical event has occurred. 

Step 4: Learning Accounting standards

These are standardized guiding principles that determine policies and the practices of financial accounting. The two most popular and adopted accounting standards include IFRS and GAAP. 

  1. International Financial Reporting Standards (IFRS): This is an international accounting standard consisting of rules for preparing financial statements. International Accounting Standards Board (IASB) is the authority responsible for amendments, addition, and updation in IFRS. By following these rules, businesses can create comparable financial statements. Most organizations across the world follow IFRS. 

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  1. Generally Accepted Accounting Principles (GAAP): US companies follow this set of accounting guidelines to bring uniformity and transparency to their financial documents. By following GAAP, companies can gain an accurate insight into their revenue

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Step 5: Becoming skilled in Creating and Analysing Financial Statements

One of the most important steps in learning the basics of accounting is to have an in-depth understanding of financial statements. Let us briefly go through these financial statements. 

  1. Balance sheet: This financial statement provides the details of equity, assets, and liabilities within an accounting period. It works on a fundamental equation where assets are the sum of liabilities and the company’s shareholder equity. Accountants use balance sheets along with other financial statements for thorough analysis. 
  2. Income statement: This financial statement covers the revenue and expenses of the company in detail. Compay’s income for a specific duration is covered in this report. Since this is a crucial document, it is submitted to statutory bodies such as SEC. Single-Step and Multiple-Step are the two types of income statements.
  3. Cash Flow Statement: This statement represents the data that is related to cash inflows and outflows. Experts can learn about the details of financial transactions through cash flow statements and even determine a company’s stock value through this statement. 

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Tips to Learn Accounting Basics

While learning the above-mentioned basic accounting concepts is important, it is equally important to follow the below-given tips:

  1. Maintain consistency: Even if you have learned about these accounting concepts in detail, you must maintain consistency. It is important to keep on learning on a regular basis. This will allow you time to learn each concept of accounting in detail.
  2. Refer to resources: It is important to be more than just a bookworm. One must refer to research papers, videos, and online courses to ensure that your knowledge is up to date.
  3. Practice: Put your theoretical knowledge to practice to ensure that you have working experience. Through practice, you will be able to understand how theory differs from actual practical experience.

FAQs

What are the five basic principles of accounting?

Five basic principles of accounting include cost principle, matching principle, objectivity principle, cost principle and revenue recognition principle.

What are the golden rules of accounting?

There are three golden rules of accounting. These include:

  1. Debit what comes in and credit what goes out.
  2. Credit the giver and debit the receiver.
  3. Credit income and debit expenses.

What are the three types of accounts?

Three types of accounts include real, personal and nominal account.

What is an accounting cycle?

An accounting cycle is the process of identification, analysis and maintaining records of the accounting events of a company.

What does a trial balance include?

A trial balance includes the balances of all ledgers compiled into debit and credit account column totals that are equal. This bookkeeping worksheetr is prepared periodically at the end of every reporting period.

About the Author
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Jaya Sharma
Senior Executive Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio

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