The accounting profession is built upon a set of foundational rules and assumptions known as accounting concepts or principles. These concepts ensure that Bookkeeping Services Jersey City information is consistent, reliable, and comparable.
While there isn’t one universally fixed list of exactly ten, here are 10 of the most critical accounting concepts that underpin financial reporting:
1. The Business Entity Concept (The Separate Wallet)
This principle states that a business is considered an entity entirely separate and distinct from its owners. The transactions of the owner (e.g., personal mortgage payments) must be kept strictly separate from the transactions of the business.
2. Going Concern Concept (Business Forever)
This concept assumes that a business will continue to operate indefinitely into the foreseeable future and will not be forced to liquidate its assets. This assumption is vital because it justifies recording assets at their historical cost rather than their immediate liquidation value.
3. Monetary Unit Concept (Money is the Measure)
This principle dictates that only transactions that can be expressed in terms of money (a common currency) are recorded in the accounting books. It also assumes that the currency is stable and its purchasing power doesn’t significantly change over time (ignoring inflation).
4. Accounting Period Concept (Time Segments)
To provide timely information, the complex life of a business is divided into specific, shorter time segments (periods), such as quarters or fiscal years, for which financial statements are prepared.
5. Cost Concept (Historical Cost)
This principle requires assets to be recorded in the accounting records at their original purchase price or acquisition cost, even if their market value has changed significantly over time. This provides objective and verifiable data.
6. Dual Aspect Concept (The Two-Sided Entry)
This is the foundation of double-entry bookkeeping. It states that every financial transaction has two effects that must be recorded. In other words, for every debit, there must be a corresponding equal credit. This maintains the fundamental accounting equation:
7. Revenue Recognition Concept (When to Count the Money)
This concept determines when revenue should be formally recorded in the financial statements. Generally, revenue is recognized when it is earned (the product is delivered or the service is performed), not necessarily when the cash is received.
8. Matching Concept (The Cause and Effect)
This principle requires that expenses incurred to generate revenue be recorded in the same accounting period as the revenue itself. This allows for an accurate calculation of net profit. For example, the cost of goods sold is matched with the sales revenue from those goods in the same period.
9. Full Disclosure Concept (Tell All)
This principle requires that all material and relevant information concerning the Bookkeeping and Accounting Services Jersey City affairs of the entity be completely and clearly disclosed in the financial statements and accompanying footnotes. This ensures users have all the necessary context.
10. Materiality Concept (What Really Matters)
The materiality concept states that only items that are significant enough to influence the decisions of a user of the financial statements should be strictly accounted for according to GAAP. Insignificant or trivial items (like a box of paper clips) may be accounted for in a simpler, more convenient way, even if it technically violates another principle.
