The Journey To Business Mastery: Entry 8

In Corporate Financial Accounting, I’ve learnt that there are multiple concepts that govern the world of accounting. And for today’s entry, I will be listing a few of them and explaining them in the way I’ve understood them.

Matching concept: This concept states that a company must align the expenses incurred in producing a product or service with the revenue that is generated by that service or product. The point is to synchronize costs with the corresponding revenue generated. In simpler terms, it makes sure the expenses “match” the income made during a time. With this concept, a business is able to have a better idea of how profitable a product or service is.

Accrual concept: This is a concept that requires that transactions be recorded in the time when they occurred, regardless of the time when cash for the transaction was received. For example, when a sale is made, it should be recorded in the books when it occurs. Not when the payment for the sale is made. To clarify (or attempt to) if sale for a product is agreed upon and documented, that is the tie of the transaction, not the time when cash payment comes in for that transaction. That is the accrual concept.

Business entity concept: This is the act of treating the business as a separate legal entity from its owners’ personal account(s). The expenses or revenue of the business should not be treated as those of the owners and vice versa. The finances must be independent and at no point should they be muddled together. This means that the business account should not be considered as an extension of the owner’s individual account. The only bit of the business account that can have a link to the owner is the reference made to the business capital from the owner.

Accounting period concept: this refers to recording accounting transactions in an established time range set aside for when accounting functions are performed and analyzed. This is known as the “accounting period”. The purpose of this concept is to ensure there is a time period for when financial statements can be prepared in accordance with those set accounting periods, and be presented to investors and stakeholders. The types of accounting periods that can be seen are the “Calendar year” and the Fiscal year”. As the name implies, the calendar year starts counting from the first day of the month of January till the final month. While “fiscal” year involves counting the financial year from the first day of any other month but January.

Full disclosure concept: This states that all a business’ relevant and important information must be disclosed in the financial statements so that the stakeholders must be able to have all the information that would afford them the ability to make the best decision for the good and growth of the business.

Not all of these concepts came up directly in class, I found a few of the terms when I looked up the idea of concepts guiding this occasionally fascinating, world of accounting. I came to the realization that I already knew of these concepts but had never put a name to them. They were just how I assumed things were done.

While numbers still intimidate me, I look forward to learning. Till next time, I bid you farewell.