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An Essential Guide to Accounting and Basic Accounting Principles for Beginners

An Essential Guide to Accounting and Basic Accounting Principles for Beginners

It can be hard to keep up with new opportunities and technologies in our rapidly changing and evolving world, especially in a professional field such as accounting. Old tricks aren’t always relevant today, so whether they like it or not, people must adapt, whether it’s a business owner who needs to learn at least the basics, or a busy accountant who’s trying to find something new to help with their workflow. 

Unfortunately, we’re not going to do the work for you, but we’ll help you answer some relevant questions. Why is accounting important? What are basic accounting principles? What is accounting software? Is it worth the cost or does it fall short? Let’s find out what’s really under the hood. 

Contents:

1. Basic accounting and its secrets

2. The Fantastic Four of accounting

3. Accounting principles: Why are they so important for any business?

4. Basic accounting principles

5. Simplify accounting job with accounting software

6. The benefits you’ll receive with accounting software

Basic accounting and its secrets

The definition of accounting sounds pretty simple: it’s a process of recording every transaction happening in your business. For example, let’s say you have a small business connected with woodwork, and you want to develop and grow in this sphere. You have the skill and talent to create beautiful masterpieces out of the wood and have a small room where all the magic is happening. So what’s your next step? 

Accounting services are the heart of all the modern markets that help people to regulate their money flow properly without any mistakes. To start the actual work, you need to understand the foundation of the whole process. Basic accounting includes five important and significant transaction types: revenue, expenses, assets, liabilities, and equity. 

Revenue – (also known as sales) the reflection of the customers’ value for the product. That’s actually what you’re going to gain by selling services or something else. To put it simply, it’s the Price + Quality of the sold products. 

Expenses – the required cost of operations to generate revenue and run your business. 

Assets – the material and nonmaterial resources owned by the company that may be used in the future to generate value.  

Liabilities – what your company owes to creditors, usually a sum of money. 

Equity – the difference between your assets and liabilities, the difference between what you own and what you owe. 

It’s essential to keep in mind all these small details of the whole picture to provide your business with up-to-date information about the accounting process. Records of all your transactions, taxes, projections, etc. help to understand the financial situation better. Without these financial statements, you won’t have an objective answer to urgent matters, which is why these are the Fantastic Four of the accounting basics. 

The Fantastic Four of accounting 

To achieve accounting profits, you need to make sure to take the following four steps to reach your goal: Recording, Repeating, Interpreting, and Analyzing. Let’s define each of them to understand the main principles thoroughly. 

STEP 1. Recording

This is the identification and recording of all your transactions. If you keep track of your business cash flow, then you’ll always be able to determine problems if they appear. The main advantage of the recording step is that you’re always aware of all the operations happening in your business. They may seem like just a bunch of numbers with a long way to go, but you’ve already started! 

STEP 2. Repeating

It’s excellent that you’ve got the previous month’s statistics, but that won’t be enough, you need to be able to compare all your business’ profits over an extended amount of time.  

To do this, you must record important accounting details. Even analyzing just two diagrams can be of great significance when assessing the financial situation of your business.

STEP 3. Interpreting

You have some tables and charts, so now what? The main point in all these steps is to understand what you’re doing and be able to read all the numbers you have on your computer at the end of the month. This doesn’t mean just “two is bad, and twenty is good”, but the realization of what these “two” and “twenty” stand for, and the significance it has for your business.

STEP 4. Analyzing

After the previous three steps, you finally have the whole picture and can start to analyze everything you and your company have done during a certain time. This will give you the basic accounting knowledge to think about any possibilities which may be helpful in growing and developing your business. 

Accounting principles: Why are they so important for any business?

As an accountant, you know that accounting principles are rules for reporting financial information. But you also know that these principles aren’t just arbitrary checklists. They’ve been developed over centuries as part of a system of checks and balances designed to provide investors with trustworthy information about companies. 

In case you’re just passing by and not quite sure what the definition is and how these principles work, accounting principles have a very real impact on businesses and their profitability. Without adherence to these standards, financial statements would be completely unreliable and useless to anyone. In short, accounting principles matter…a lot.

Accepted accounting principles: Generally Accepted Principles vs International Financial Reporting Standards

The Financial Accounting Standards Board (FASB) is the authoritative source of guidance for private companies, non-profit organizations and other industry groups when it comes to setting accounting principles. The FASB and the Governmental Accounting Standards Board (GASB) developed Generally Accepted Accounting Principles (GAAP). However, the FASB is responsible for the standard set of guidelines that all publicly traded companies must follow when they report their financial statements. These accounting standards are implemented to improve the quality of financial information reported by companies.


*By law, accountants representing all publicly traded companies in the US must comply with GAAP. 


Private businesses, non-profit organizations and other industry groups can adopt specific GAAP principles as they see fit. However, these basic principles aren’t universal across all industries or jurisdictions. The International Financial Reporting Standards (IFRS) is the most widely used set of accounting principles in EU countries. 

The purpose of accounting principles

Accounting principles are the rules and guidelines that accountants must follow to ensure their financial statements accurately reflect a company’s performance. These principles are established to:

  • ensure that the financial statements are complete, consistent, and comparable over a period of time;
  • help investors identify risk;
  • measure performance and make informed decisions;
  • help investors understand the fair value of assets, liabilities and equity.

Basic accounting principles

Basic accounting principles are the foundation for all other financial reporting. Understanding these concepts is essential for anyone who wants to work in finance, be an effective business owner or manage a company. 

Let’s take a look at the most basic accounting concepts that were mentioned by Giovanni Rigters in the book “Accounting for Beginners & Dummies: Fundamental Principles of Financial Management”.

Accrual principle

Any accounting transaction must be reported as soon as it takes place without waiting to receive the cash flow from that transaction.

The principle entails that the transaction must be recorded regardless of cash movements. It should be documented in the accounting records and financial statements by the time of the action and deal, not by the period of the cost and revenue entry. By doing this, you’re pinpointing the financial static rather than the monetary flow. 

Conservatism principle

Your records should always lean towards expecting a loss rather than hoping for a profit.

The principle states the importance of recording expenses and liabilities once they occur BUT only recording assets and revenue when there’s a certainty of these occurring. Following this principle, accountants can organize financial records in a conservative manner – lower reported profits will be shown due to the delays in assets and revenue recognition. 

Consistency principle

It [consistency principle] entails following the same accounting principle to record financial transactions to maintain consistency.

Auditors are mostly concerned with how businesses comply with this particular principle. It focuses on the consistency with which methods and policies are applied in the preparation of financial information during each period. Any changes that occur in methods and policies should be documented within the financial statements. Businesses are expected to be consistent when following certain principles unless there occurs a better functional one. 

Cost principle 

The principle records transactions because original prices are objective and prove the assets’ value.

This principle states that any asset (equity investments, liabilities, or any short and long-term assets) should be recorded in its original cost when purchased or acquired since this amount can’t be altered due to inflation or depreciation. 

Economic entity principle

Any business transactions must be recorded separately from the owner’s or business partners’ activities.

The principle entails that bank and accounting records shouldn’t be mixed with the assets and liabilities of different entities in a business. When recording each business transaction it should be assigned to its respective entity (government agency, corporation, etc.). This is done to avoid confusion in financial records and make it easier to distinguish between business activities during an audit. 

Full disclosure principle

Recording all information that may influence the reader’s understanding of the financial statements.

The principle states that all the accounting methods adopted by a business should be recorded in the financial statements’ footnotes, balance sheet or in any other places in the financial document. Full disclosure principle ensures that the accountants include all the necessary information into financial documents. 

Matching principle

Any revenue should be recorded with the related expenses in the same period.

The principle entails that the earned income and related expenses must be accounted for in the same accounting period. If the income and expenses don’t correlate, the costs must be charged to expenses. This concept highlights the necessity of recording the cause and effect of revenues and expenses. 

Materiality principle

[Materiality principle] entails recording a transaction if ignoring it might affect business decisions by the people reading the financial statement.

The principle states that according to the US securities and exchange commission it’s recommended to record items that represent at least 5% of all assets on a balance sheet, even though GAAP standards don’t enforce the recording of immaterial transactions. 

Note: Materiality principle varies from business to business since the items that are considered material are different for each organization. 

Reliability principle

This concept entails only recording transactions that can be proven by official documents that auditors review.

Reliability principle requirement is that accountants are able to present accurate and relevant information in an organization’s accounting records using proven evidence that the transaction exists. The examples of the documents that can be accepted as actual evidence are invoices, purchase receipts, bank statements, canceled checks, etc. 

Time period principle

Time period principle mandates creating accounting reports over a standard period.

This principle states that businesses should create accounting records at the same time when they generate their financial statements to create the so-called consistency in reporting and allows managers to track the overall business performance based on various metrics from the records created on a monthly, quarterly, or annual basis. 

Simplify accounting job with accounting software

Accountants aren’t robots, but people. Mistakes do occur, especially when you’re working with an accounting ledger. You have to be responsible and attentive to details to avoid errors in your charts. 

According to the recent statistics about the accounting software’s role in accounting processes: 

  • Almost 75% of accounting tasks can be automated by using the software. 
  • More than 64% of SMBs are using accounting software.
  • More than 90% of accountants said that using cloud base accounting software brings a big difference in their business process.

Such innovations are a change and a chance to develop. The difference between different accounting software solutions lies mainly in their functionality and the connection process. Normally, the record of the transactions to these software solutions is manual, even though the tool provides the users with the reports or reconciliation of the accounts at the very end.   

However, there are tools that do all the boring work for you, transferring the information about the transactions from the connected platforms (sales channels and/or payment platforms) right into the accounting software such as QuickBooks and Xero.

One of such solutions is Synder Sync. It provides a unique opportunity to enhance the way your software works without any additional effort of entering an endless stream of numbers. Synder automation will save you from all the difficulties you may encounter. 

How Synder Sync woks

By synchronizing your e-commerce store and payment platform with the actual accounting software, you gain a wide range of the additional details of the stored transactions, like shipping costs and tax prices, plus a huge list of lifesaving features for a better workflow. You don’t have to spend sleepless nights calculating incoming and outgoing transactions anymore. 

Synder Sync is convenient software that helps you keep track of your transactions in real-time, customize and organize them in a suitable format. As soon as the payment was done and recorded in the sales channel and/or payment platform, you can sync it from Synder right into the accounting software (or make this process automated as well in the Synder’s settings). 

Synder’s customer support team is ready to help you 24/7 to improve efficiency and productivity of your business! Try our free trial (without credit cards) to see all the options available or schedule a demo session to see the whole process from the beginning to the very end explained by our experts.  

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The benefits you’ll receive with accounting software

Now that you’ve seen the whole picture of accounting and Synder Sync, you may be wondering what benefits you’ll get. So what are they? 

Record of your growth

You definitely have business-related goals, so it’s essential to have daily, monthly, and even yearly records of all processes and improvements made and implemented during a certain period of time. 

Assistant during tax season

The software provides assistance and insurance that you’ll pay the right amount of taxes, especially during the accounting busy season. If you want to avoid overpaying, you need to have an accurate calculation of payments, which may be hard for a person, but not for accounting software with automation. 

Time saver

Accounting software will do everything you need in just a few combinations of clicks, no more sleepless nights and monotonous work.  

Reconciliation in just one click

The ability to reconcile transactions from any data with 100% accuracy and without losing a dollar. There’s even no need to do everything in one particular currency, especially when you integrate with the help of Synder, as there’s an opportunity to record multi-currency transactions

Tracker of the cash flow

You can always track how much money you have on hand and how much you’ll need to spend in the future due to some circumstances. Accounting software will help you to make vital decisions based on your current cash standing. 

Bottom line

Wrapping up all the previous statements, it’s hard not to admit that accounting plays a crucial role in running a business. All businesses have to come up with ways of capturing and reporting accounting data. To provide useful information and simplify decision-making, businesses will have to use consistent accounting methods, procedures and standards. Adherence to these established principles grants not only the reliability and sustainability of the workflow but also confidence in future development. 

Even at the beginning of the month, you may be assured of what you might expect in the next four weeks of endless circulation of money within your company. However, the right accounting management system and timely cash flow statements can help deal with any situation. Well-chosen accounting software will help with creating a proper accounting management system. So choose wisely and never forget that blindly relying only on the tool is also not the best case scenario. Each accounting software needs its own accountant!

Anastasia Su

Anastasia Su

Anastasia is a FinTech writer with experience working as a freelance writer for small business owners. She has participated in numerous events dedicated to business management and marketing. Anastasia is inspired by the fact that each successful business is a result of proper structuring so she tries to analyze every step and wants to share her observations with others.

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