Basic Accounting Concepts


Accounting is a vast area of study and seems to get more complicated every day. While most people will never require an in-depth understanding of accounting methodologies and practices, understanding basic accounting concepts gives the average person an advantage when making decisions concerning investments.

Accounting Methods

  • There are three common methods of accounting: cash, accrual and modified. Cash accounting means you record income when you receive payment and expenses when you pay for them. Accrual accounting means you record income when you earn it and expenses when you incur the expense. Modified accounting is any combination of cash and accrual.

The Accounting Year

  • Accounting is reported on a calendar year or fiscal year basis. A calendar year is Jan. 1 through Dec. 31 of any year. A fiscal year begins with whatever date the company elects. For certain types of business a calendar year does not accurately reflect a complete 12-month cycle of income and expense so a fiscal year provides a better picture of annual performance. For example, a professional football team might elect a fiscal year that starts in August and ends in July in order to report on the revenue and cost of a single football season.

The Balance Sheet

  • A balance sheet is a financial statement that lists all assets, liabilities and owner's equity for a company. The balance sheet reflects the universal accounting equation of "Assets equals Liabilities plus Owner's Equity." (see reference 1) Assets include items such as checking accounts, inventory, office furniture and accounts receivable. Liabilities include items such as operating accounts payable, mortgage notes payable and payroll taxes payable. Owner's equity includes any money the owner invests in the business and the net income or loss of the business to date.

The Income Statement

  • An income statement lists a detail of all forms of income and expense for a specific time period. Expenses are usually further broken down into subsections such as office expense, payroll expense and marketing expense. The difference between income and expense is net income or net loss.

The General Ledger

  • The general ledger is a report that lists every item in a company's chart of accounts and the transactions that post to that account. The chart of accounts includes every item found on the balance sheet and income statement, making a general ledger a comprehensive, detailed backup for every number on the financial statements.


  • Schaum's Outline of Theory and Problems of Principles of Accounting I; Joel J. Lerner and James A. Cashin;
Promoted By Zergnet


You May Also Like

  • How to Learn Basic Accounting Concepts

    So you need to learn basic accounting concepts - what now? Read on to find out your options for learning basic accounting......

  • Understanding Accounting Basics

    The basic principles of accounting include historical costs, accrual accounting, matching concepts, consistency and revenue recognition. Learn these basic principles ...

  • What Are the Basic Accounting Theories?

    This basic equation is the formula and theory behind the double ... to management accounting is that no universal accounting system exists...

  • Accounting 101 Basics

    Accounting 101 or basic accounting deals with the basic concept of bookkeeping or recording transactions that occur on a daily basis. This...

  • Basics of Accounting

    Understanding the basics of accounting is fundamental to understanding business transactions. After all, a business owner or manager needs to know if...

  • Basic Elements of Accounting

    The basics of accounting involve three fundamental elements; assets, liabilities and equity. These elements make up the basis for financial reports such...

  • What Are the Basic Assumptions of Accounting?

    Accountants use a range of underlying concepts designed to ensure consistency when preparing company accounts. These include principles as to how accountants...

  • What Is Basic Financial Accounting?

    What Are Basic Financial Accounting Concepts? Financial accounting preserves business operations in ledgers as financial transactions.

Related Searches

Is DIY in your DNA? Become part of our maker community.
Submit Your Work!