Key Accounting Concepts

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Hi, everyone, and welcome back. I'm Justin from thick numbers. And in this section we're going to be talking about the key accounting concepts. These fall in the basis and the absolute underlying assumptions behind everything to do with accounting. Every time you're thinking about a transaction, or looking at a financial statement, all of these key concepts need to be at the back of your mind. They're almost like changing your entire perspective on how to look at the world.

But once you understand these core concepts, they'll make you understand accounting a lot easier. So let's start. The first concept we're going to be going over is the accounting entity concept. This is about understanding business from a business perspective, and not from the individual shareholders perspective. It's about separating your business transactions from your personal transactions. The second concept that we're going to go over is called the period concept.

This is about separating time into periods of time. And so transactions occur either as at a certain point in time, or we can be looking at a range of time to actually record transactions. The third concept we're going to be talking about is the reliability assumption. What the reliability assumption means is about understanding that transactions in order to be recorded in accounting terms that need to be reliably measured. So you can't make a guess of a certain transaction you have to have reliable, measurable, objective evidence in order to record it as a transaction. The next concept is called the relevance concept.

And this concept is about understanding that different stakeholders will have different needs and an information will be important for them to make decisions depending on who they are and what perspective they come from. Before providing the right relevant information is key. Then we're going to be talking about compatibility. I think in accounting needs to be comparable, whether it's from period to period, or from transaction to transaction. It could even be across different industries or different competitors. Everything needs to be measured and classified in the sideways so that we have apples with apples.

And we're going over this in more detail. And finally, we'll be understanding the difference between cash and accrual basis of accounting. Whereas cash basis has to do with cash transactions accrual basis, flows back to a period of time and actually looks at whether costs have been incurred or revenues have been earned. So without further ado, let's dive straight into it.

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