Computerized Accounting

To understand what computerized accounting is, it’s essential to know how accounting systems can be represented. So, let’s examine the figure below. The purpose of accounting is to provide financial information that is useful for decision-making. Accounting can be viewed as a system (or a process) that converts data into useful information. The information processes include recording, maintaining,…

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Accounting Conventions

What Are Accounting Conventions? Accounting conventions are general rules of practice arising from customs, usages, and traditions. These conventions serve as the guiding principles for accounting. Accountants follow these rules based on the widely accepted idea that accounting practices should be consistent, that financial statements should be prepared on a conservative basis to mitigate the risk…

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Accrual Concept of Accounting

Accrual Concept of Accounting: Definition The accrual concept of accounting is based on the economic premise that profits are best measured by changes in owners’ equity between the beginning and the end of any accounting period. Accrual Concept of Accounting: Explanation According to the accounting equivalence concept, when sales of goods or services are made, assets are likely to go up, either by…

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Closing Entries

What Are Closing Entries? Closing entries are the journal entries used at the end of an accounting period. These entries are made to update retained earnings to reflect the results of operations and to eliminate the balances in the revenue and expense accounts, enabling them to be used again in a subsequent period. When Are Closing Entries Passed? Closing entries are passed on the last day of the…

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Cash vs Accrual Basis of Accounting

Cash Basis vs. Accrual Basis of Accounting: Definition The cash basis and the accrual basis are the two basic methods of accounting. Each method identifies a different set of rules for recognizing revenues and expenses. The accrual basis of accounting means that revenues, expenses, and other changes in assets, liabilities, and owners’ equity are accounted for in the period in which the economic ev…

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Responsibility Accounting

Definition Responsibility accounting is a fundamental piece of good budgeting. Budgets must be prepared by the people who will be responsible for achieving them. Explanation When budgets are prepared by the individuals who are held responsible for achieving them, this ensures that full use is made of the knowledge of the people who have access to the greatest level of detail. It also means that ma…

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Accounting Concepts and Principles

Accounting Concepts Accounting concepts are basic assumptions on which we base our accounting records. They are the things that we assume but, in certain cases, that may not be correct. For example, one of the most common assumptions is that money has a stable value. We all know that this is not really correct because inflation continuously erodes the value of monetary units. However, it would be…

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Advantages of Adhering to Accounting Concepts and Principles

This article mentions five major advantages associated with the proper use of accounting concepts and principles. First, accounts prepared in accordance with generally accepted accounting principles and concepts are more accurate and reliable. Second, the users of financial statements attach greater credibility to statements prepared in accordance with generally accepted accounting principles. Hen…

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Cost Concept of Accounting

Cost Concept of Accounting: Definition The cost concept of accounting states that all acquisitions of items (e.g., assets or items needed for expending) should be recorded and retained in books at cost. Therefore, if a balance sheet shows an asset at a certain value, it should be assumed that this is its cost unless it is categorically stated otherwise. Explanation Under the cost concept of accoun…

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Business Entity Concept

Business Entity Concept: Definition The business entity concept states that a business is an entity in itself. That is to say, it should be treated as a separate person, one that is distinct from its owner. The concept is also known as the separate entity concept and the economic entity concept. Under the business entity concept, it is assumed that for the purpose of accounting practices, business…

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