Basic Accounting Principles: Accounting Basics And Main Principles for Beginners

What is Gross Profit

It can be hard to keep up with new opportunities and technologies in our rapidly changing and evolving world, especially in a professional field such as accounting. Old concepts and tricks aren’t always relevant today, so whether they like it or not, people must adapt, be it a business owner who needs to learn at least the basics or busy accounting professionals who are trying to find something new to help with their workflow.

Unfortunately, we’re not going to do the work for you, but we’ll help you answer some basic and relevant questions. Why is accounting important? What are basic accounting principles? How to simplify your accounting processes? What is accounting software? Is it worth the cost or does it fall short? Let’s find out what’s really under the hood. 

Remember that if you’re not a professional accountant, even with the knowledge of all the accounting principles and fundamental accounting concepts, it’s better to contact a specialist when preparing for the tax season. Software solutions can help but won’t do all the work themselves. 

Contents:

1. Basic accounting and its secrets

2. The Fantastic Four: Record – Repeat – Interpret – Analyze

3. Accounting principles: Why are they so important for any business?

4. Basic accounting principles

5. Simplify bookkeeping with accounting software

6. The benefits you’ll receive with accounting software during accounting period

Basic accounting and its secrets

The definition of basic accounting sounds pretty simple: it’s a process of recording every transaction happening in your business. For example, let’s say you have a small woodwork business, and you want to develop and grow in this sphere. You have the skill and talent to create beautiful wooden masterpieces and have a small room where all the magic is happening. So what’s your next step? 

To start the actual work, you need to understand the foundation of the core procedures of all the modern markets – accounting services that help people regulate their money flow properly without any mistakes. Basic accounting terms include five important and significant transaction types: revenue, expenses, assets, liabilities, and equity. 

Revenue – (also known as sales) the financial information reflecting the customers’ value for the product. That’s actually what you’re going to gain by selling services or something else. To put it simply, it’s the Price + Quality of the sold products. 

Expenses the required cost of operations to generate revenue and run your business. 

Assets – the material and nonmaterial resources owned by the company that may be used in the future to generate value.  

Liabilities – what your company owes to creditors, usually a sum of money. 

Equity – the difference between your assets and liabilities, the difference between what you own and what you owe. 

It’s essential to keep in mind all these small details of the whole picture to provide your business with up-to-date information about the accounting process. Records of all your transactions, taxes, projections, etc. help understand the financial situation better. Without these financial statements, you won’t have an objective answer to urgent matters, which is why these are the Fantastic Four of the accounting basics for small businesses

The Fantastic Four: Record – Repeat – Interpret – Analyze

To achieve accounting profits, you need to make sure to take the following four steps to reach your goal: Recording, Repeating, Interpreting, and Analyzing. Let’s define each of them to understand the main accounting principles thoroughly. 

STEP 1. Recording

This is the identification and recording of all your transactions. If you keep track of your business cash flow, then you’ll always be able to determine problems if they appear. The main advantage of the recording step is that you’re always aware of all the operations happening in your business. They may seem like just a bunch of numbers, but you’ve already started! 

STEP 2. Repeating

It’s excellent that you’ve got the previous month’s statistics, but that won’t be enough. What you need now is to compare your company’s profits or your accounting clients over an extended amount of time.  

To do this, you must record important accounting details. Analyzing any piece of statistics can be of great importance when assessing the financial situation of your business.

STEP 3. Interpreting

You have some tables and charts, so now what? The main point here is to understand what you’re doing and be able to read all the numbers you have on your computer at the end of the month. You need to realize what the numbers stand for, and the significance they have for running your business.

STEP 4. Analyzing

Having completed the previous three steps, you finally have the whole picture and can start to analyze the financial information you and your company have stored during a certain time. This will give you the basic accounting data to think about the opportunities of growing and developing your company. 

Accounting principles: Why are they so important for any business?

As an accountant, you know that accounting principles are rules for reporting financial information. But you also know that these principles aren’t just arbitrary checklists. They’ve been developed over decades as part of a system of checks and balances designed to provide investors with trustworthy information about companies. 

Accounting principles have an essential impact on businesses and their profitability. Without adherence to these standards, financial statements would be completely unreliable and useless to anyone. In short, accounting principles matter a lot.

Accepted accounting principles

The Financial Accounting Standards Board (FASB) is the authoritative source of guidance for private companies, non-profit organizations and other industry groups when it comes to setting accounting principles. The FASB and the Governmental Accounting Standards Board (GASB) developed Generally Accepted Accounting Principles (GAAP). However, the FASB is responsible for the standard set of guidelines that all publicly traded companies must follow when they report their financial statements. These accounting standards are implemented to improve the quality of financial information reported by companies.


*By law, accountants representing all publicly traded companies in the US must comply with GAAP. 


Private businesses, non-profit organizations and other industry groups can adopt specific GAAP principles as they see fit. However, these basic principles aren’t universal across all industries or jurisdictions. The International Financial Reporting Standards (IFRS) is the most widely used set of accounting principles in EU countries. 

The purpose of these principles in financial reporting

Accounting principles are the rules and guidelines that accountants must follow to make sure their financial statements accurately reflect a company’s performance. These principles are established to:

  • ensure that the financial statements are complete, consistent, and comparable over a period of time;
  • measure performance and make informed decisions;
  • help investors identify risk;
  • help investors understand the fair value of assets, liabilities and equity.

Basic accounting principles

Basic accounting principles are the foundation for all other financial reporting. Understanding these concepts is essential for anyone who wants to work in finance, be an effective business owner or manage a company. 

Let’s take a look at the most basic accounting concepts that were mentioned by Giovanni Rigters in the book “Accounting for Beginners & Dummies: Fundamental Principles of Financial Management”.

Revenue recognition principle (accrual)

Any accounting transaction must be reported as soon as it takes place without waiting to receive the cash flow from that transaction.

The revenue recognition principle entails recording the transaction regardless of cash movements. It should be documented in the accounting records and financial statements by the time of the action and deal, not by the period of the cost and revenue entry. By following the revenue recognition principle, you’re pinpointing the financial static rather than the monetary flow. 

Conservatism principle

Your records should always lean towards expecting a loss rather than hoping for a profit.

The principle states the importance of recording expenses and liabilities once they occur BUT only recording assets and revenue when there’s a certainty of these occurring. Following this principle, accountants can organize financial records in a conservative manner – lower reported profits will be shown due to the delays in assets and revenue recognition. 

Consistency principle

It [consistency principle] entails following the same accounting principle to record financial transactions to maintain consistency.

Auditors are mostly concerned with how businesses comply with this particular principle. It focuses on the consistency with which methods and policies are applied in the preparation of financial information during each period. Any changes that occur in methods and policies should be documented within the financial statements. Businesses are expected to be consistent when following certain principles unless there occurs a better functional one. 

Cost principle 

The principle records transactions because original prices are objective and prove the assets’ value.

This principle states that any asset (equity investments, liabilities, or any short and long-term assets) should be recorded in its original cost when purchased or acquired since this amount can’t be altered due to inflation or depreciation, embodying the double entry accounting system’s precision in maintaining a clear record of asset valuation.. 

Economic entity principle

Any business transactions must be recorded separately from the owner’s or business partners’ activities.

The principle entails that bank and accounting records shouldn’t be mixed with the assets and liabilities of different entities in a business. When recording each business transaction, it should be assigned to its respective entity (government agency, corporation, etc.). This is done to avoid confusion in financial records and make it easier to distinguish between business activities during an audit. 

Full disclosure principle

Recording all information that may influence the reader’s understanding of the financial statements.

The principle states that all the accounting methods adopted by a business should be recorded in the financial statements’ footnotes, balance sheet or in any other places in the financial document. Full disclosure principle ensures that accountants include all the necessary information into financial documents. 

Matching principle

Any revenue should be recorded with the related expenses in the same period.

The matching principle entails that the earned income and related expenses must be accounted for in the same accounting period. If the income and expenses don’t correlate, the costs must be charged to expenses. The concept of the matching principle highlights the necessity of recording the cause and effect of revenues and expenses. 

Materiality principle

[Materiality principle] entails recording a transaction if ignoring it might affect business decisions by the people reading the financial statement.

The principle states that according to the US securities and exchange commission, it’s recommended to record items that represent at least 5% of all assets on a balance sheet, even though GAAP standards don’t enforce the recording of immaterial transactions, highlighting the fundamental balance between debits and credits in accounting

Note: Materiality principle varies from business to business since the items that are considered material are different for each organization. 

Reliability principle

This concept entails only recording transactions that can be proven by official documents that auditors review.

Reliability principle requirement is that accountants are able to present accurate and relevant information in an organization’s accounting records using proven evidence that the transaction exists. The examples of the documents that can be accepted as actual evidence are invoices, purchase receipts, bank statements, canceled checks, etc. 

Time period principle

Time period principle mandates creating accounting reports over a standard period.

This principle states that businesses should create accounting records at the same time when they generate their financial statements to create the so-called consistency in reporting and allows managers to track the overall business performance based on various metrics from the records created on a monthly, quarterly, or annual basis. 

Simplify bookkeeping with accounting software

Accountants aren’t robots, they’re human. Mistakes do occur, especially when you’re working with an accounting ledger for any company. You have to be responsible and attentive to details to avoid errors in your charts. 

According to the recent statistics about the role of accounting software in accounting processes 

  • Almost 75% of accounting tasks can be automated by using the software. 
  • More than 64% of SMBs are using accounting software.
  • More than 90% of accountants said that using cloud base accounting software brings a big difference in their business process.

Such innovations are a change and a chance to develop. The difference between different accounting software solutions lies mainly in their functionality and the connection process. Normally, the record of the transactions to these software solutions is manual, even though the tool provides the users with the reports or reconciliation of the accounts at the final stage process.   

However, there are tools that do all the boring work for you, transferring the information about the transactions from the connected platforms (sales channels and/or payment platforms) right into the accounting software such as QuickBooks and Xero.

One of such solutions is Synder Sync. It provides a unique opportunity to enhance the way your software works without any additional effort of entering an endless stream of numbers. Synder automation will save you or your accountant the trouble of manually recording financial data. 

How Synder Sync woks

By synchronizing your e-commerce store and payment platform with the actual accounting software, you gain a wide range of additional details of the stored transactions, like shipping costs and tax prices, plus a huge list of lifesaving features for a better workflow. You don’t have to spend sleepless nights calculating incoming and outgoing transactions anymore. 

Synder Sync is top-notch accounting software that helps you record your ongoing transactions, customize and organize them in a suitable format. As soon as the payment was completed and recorded in the sales channel and/or payment platform, you can sync it from Synder right into the accounting software (or make this process automated in Synder’s settings). 

Improve the efficiency and productivity of your business with Synder – schedule a demo session to see the whole process from beginning to end explained by our experts.   

The benefits you’ll receive with accounting software during accounting period

Now that you’ve seen the whole picture of how Synder Sync works on your accounting, you may be wondering what benefits you’ll get. 

Record of your growth

You definitely have business-related goals, so it’s essential to record daily, monthly, and even yearly processes and improvements made during a certain period of time. Synder automates the recording process so you’ll be able to improve and implement appropriate business strategies.

Assistant during tax season

The software provides assistance and insurance that you’ll pay the right amount of taxes, especially during the accounting busy season. If you want to avoid overpaying, you need to have an accurate record and calculation of payments, which may be hard for a person, but not for accounting software with automation. 

Time saver

Accounting software will do everything you need in just a few clicks – no more sleepless nights and monotonous work.  

Reconciliation in just one click

You’ll get the ability to reconcile transactions from any data with 100% accuracy and without losing a dollar. When you integrate with the help of Synder, there’s no need to do it in one particular currency, especially, as there’s an opportunity to record multi-currency transactions

 Cash flow tracker

Using Synder, you can always track and record how much money you have on hand and how much you’ll need to spend in the future due to some circumstances. The software will help you make vital decisions based on your current cash standing. 

Bottom line

Wrapping up, there’s no denying that accounting plays a crucial role in running a business. All businesses have to come up with ways of capturing and reporting accounting data. To provide useful information and simplify decision-making, businesses will have to use consistent accounting methods, procedures and standards. If you adhere to these established principles, not only do you get reliable and sustainable workflow but also confidence in future growth. 

Choosing the right accounting software, creating a proper accounting management system and generating timely cash flow statements are the key to success.

Curious about accounting and new technologies? Read our fresh AI in Accounting article!

Total
11
Shares
Comments 7
  1. This is a straightforward and crispy method of understanding the subject. It is beneficial and gives confidence too.
    Thanks to you

  2. Your blog is comprehensive and well-written, as it addresses almost every facet of the skills that will be in high demand.

  3. Anastasia Su’s article on basic accounting principles is super helpful! It breaks down complex concepts into easy-to-understand info, perfect for beginners or pros. I love the “Fantastic Four” steps, making accounting feel less daunting. The detailed explanation of principles like “Revenue Recognition and Conservatism is spot-on.” The article also dives into the importance of accounting software, like Snyder Sync, which is a game-changer. Overall, it’s a must-read for anyone wanting to understand and ace the accounting game!

Leave a Reply

Your email address will not be published. Required fields are marked *

You May Also Like