Accounting Concepts
Concepts To Improve Your Financial Skills
7 basic accounting concepts
There are many concepts professionals in accounting use to help them provide the best services to their clients, whether professionals or businesses. Some of the most common concepts include:
For a business, the total amount of money the company receives for selling services and products is its revenue. This means it’s a company’s gross income before deducting any expenses. You can do this by adding all of a company’s earnings, equity increases and interest it gains over the reporting period. A company may deduct its tax liabilities or various expenses from this revenue to determine its profit.
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Expenses are the costs a business incurs to generate revenue. This can include supplies and materials, rent, advertising, employee salaries, repairs and taxes. For example, a restaurant manager may purchase ingredients regularly from a supplier to operate the business. To earn an income, a business aims to have its expenses be less than its revenue.
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Assets are resources a business owns that bring it economic benefits. A company can calculate its assets by adding its liabilities to its equity. There are current and non-current assets, which are:
Liabilities are economic obligations or what a business owes to other organizations, such as lenders and creditors. Like assets, liabilities can also be current or non-current. The differences between these are:
Capital can be anything that provides value or benefits for a business owner, including assets, machinery, property, inventory and patents. Although cash can be a type of capital, capital usually refers to investments that generate wealth for a business. Here are some types of capital:
An account is a type of transaction, such as cash or sales. Businesses record accounts in a general ledger, which is an accounting book that stores and organizes transactions. Accounts receivable include the money customers owe a company for goods and services. Accounts payable are the money a business owes to creditors and suppliers for goods and services.
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Financial statements are documents that show the transactions of a business or person. Here are some different financial statements and their definitions:
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