Accounting 101 for Beginners: Basic Terminology & Definitions

what are basic accounting principles

In accounting terms, profit — or the “bottom line” — is the difference between your income, COGS, and expenses (including operating, interest, and depreciation expenses). A business with healthy (positive) equity is attractive to potential investors, lenders, and buyers. Investors and analysts also look at your business’s EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization. Equity can also be defined as the difference between your business’s assets (what you own) and liabilities (what you owe).

  • In the case of cash sales, revenues will be reported when customers pay for their merchandise.
  • The board comprises seven full-time, impartial members, ensuring that it works for the public’s best interest.
  • However, some businesses ignore this principle these days since they may opt to adjust assets and liabilities according to fair values instead.
  • IFRS rules ban the use of last-in, first-out (LIFO) inventory accounting methods.
  • This group determined that the APB must be dissolved and a new standard-setting structure created.
  • This prevents your accountant from delaying the reporting of expenses, which can lead to an incomplete picture of your business’s overall financial situation.

Payroll also includes fringe benefits distributed to employees and income taxes withheld from their paychecks. Current liabilities are liabilities due within one year of a financial statement’s date. Long-term liabilities have due dates of more than one year.The term also appears in a type of business structure known as a limited liability company (LLC). LLC structures allow business owners to separate their personal finances from the company’s finances.

Learn More About Fundamental Principles

This sometimes allows companies to defer the recognition of certain expenses into future accounting periods. The basic accounting principles listed here overlap with a handful of GAAP concepts, like matching and materiality, but do not cover all of them. For a full rundown of GAAP and what each concept means, see NerdWallet’s generally accepted accounting principles (GAAP) explainer.

However, businesses should recognize expenses sooner, when there’s even a reasonable possibility that they will be incurred. It’s better for cash flow purposes to overestimate your expenses rather than your income. The “going concern” accounting principle says you should assume that your business is in good financial condition and will remain in operation for the foreseeable future.

Introduction to Accounting Principles

GAAP is focused on the accounting and financial reporting of U.S. companies. The Financial Accounting Standards Board (FASB), an independent nonprofit organization, is responsible for establishing these accounting and financial reporting standards. The international alternative to GAAP is the International Financial Reporting Standards (IFRS), set by the International Accounting Standards Board (IASB).

Even if you hire an accountant to manage your books, you need to have a basic knowledge of how things work to ensure they’re being processed correctly. QuickBooks from Intuit is a small business accounting software that allows companies to manage business anywhere, anytime. It presents organizations with a clear view of their profits without what are basic accounting principles manual work and provides smart and user-friendly tools for the business. While GAAP is the standard inside the United States, it isn’t globally recognized by the International Accounting Standards Board (IASB). This means that global companies will likely need to prepare their financial reports in a different format for other countries.

Key documents for business accounting

These records may then be used in official financial reports such as balance sheets and income statements. Accrual basis accounting (or simply “accrual accounting”) records revenue- and expense-related items when they first occur. Accrual accounting recognizes that $2,000 in revenue on the date of the purchase. The method contrasts with cash basis accounting, which would record the $2,000 in revenue only after the money is actually received.

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