Common Concepts in Accounting

Common Concepts in Accounting

If you operate a company in Johor Bahru, despite the scale of your business, accounting services are crucial for you (Also see Accounting Allies You Need for Your Start-Up). Accounting is essential to any person who handles any issue that is related to money, no matter it is in business or employment.

Hence, a simple explanation of the common concepts in accounting (Also see Financial Accounting – Basic Principles, Conventions and Assumptions) would be helpful for almost everybody.

For individuals, accounting concepts (Also see Accounting – Prudence Concept) will help in preparing budgets, as well as managing your finances in a more organised manner. If you are running a business, an insight of accounting principles will assist you in raising questions regarding transactions, understanding where funds come from and where it is going, as well as analyse financial information that your accounting service provider has created.

Some common concepts in accounting are as follows:

Equation in Accounting

As the double entry concept develops, it brings to the accounting equation. This is a basic equation that all the accounting firms in Johor Bahru would use.

The formula comprises of three elements, which are the assets, shareholders’ equity, as well as liabilities.  The equation is written as below:

Assets = Shareholder’s Equity + Liabilities

Based on the equation above, you may notice that what has a business owner borrow (liabilities) and the amount the investors have injected (shareholder’s equity) will make up what a business possesses (assets) for them to earn the profit.

Double Entry Concept

It may be as old as the subject of accounting is. Double entry accounting is universal, and people would use it to illustrate how precise the transactional records are.

The idea which leads this concept is that each financial transaction that happens will cause at least an identical and opposite effect in an account which is complementary to it (Also see Understanding Dual Aspect Concept). That implies each entry affects at least two accounts. Thus, one should record all transactions as either debit or credit, which is determined by the overall impact of the deal.

If you observe your accounting services providers, you will find out that they will record any entry that increases an asset or lessens equity or a liability account on as debits. Conversely, credit is entries which will decrease the expense accounts or the assets of a business.

Relevance

When you collaborate with a firm or a person to deliver accounting services in Johor Bahru for your company, you will most probably expect them to provide you with pertinent details (Also see 4 Alerting Indications on Your Financial Statements). This adheres to the relevance principle of accounting which asks for accountants to provide information which may affect management decisions, that is, it must assist the customers to forecast the result (predictive value) and confirm previous predictions (confirmatory value). As an example, earnings reports help greatly in confirming previous forecasts, as well as doing sales forecasts.

The Going Concern Concept

Another name for the going concern concept is the going concern assumption. This concept implies that accounting services providers and other stakeholders would treat a business as if it is going to continue functioning and fulfilling its responsibilities in the predictable future. In short, it means that people will assume that the company is going to sustain as there are no issues concerning its’ existence in future. People will call the firms that predict such a future as a going concern, whereas those that are expected to stop functioning are not a going concern.

Fair Representation

This idea treats accounting service as if it is an umpire or a judge in a match. It is a must for accountants (Also see Situations Where Having the Right Accountant Can be Handy) to give the information which is not just relevant but also accurate, unbiased and complete so that it is a fair representation.

These are only some examples of the concepts which people would use them frequently in the financial world.